Saturday, November 12, 2011

Eurozone bailout fund has to buy own debt is a sign a different approach is needed

In the category of you cannot make this stuff up, the Telegraph reports that the Eurozone bailout fund had to buy its own debt because investment bankers could not find enough willing buyers.

If ever there was a clear signal that a different approach is called for this is it.

Regular readers know that I have proposed a different approach based on disclosure, deposit guarantees and the fact that banks can continue to operate while having significant negative book capital.
The European Financial Stability Facility (EFSF) last week announced it had successfully sold a €3bn 10-year bond in support of Ireland. 
However, The Sunday Telegraph can reveal that target was only met after the EFSF resorted to buying up several hundred million euros worth of the bonds. 
Sources said the EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt. 
The revelation will be seen as a major failure and a worrying sign of future buyers strike after EFSF officials and their bankers had spent recent weeks travelling the world attempting to persuade key investors, including China's national wealth fund and Japanese government funds, to buy its bonds....
Chinese and Japanese money was crucial to last year's first bond sales by the EFSF, but they have since been dismayed by the eurozone's failure to resolve the worsening debt crisis and alarmed at how fund has morphed from being a rescue facility for European banks into a potentially €1 trillion leveraged first-loss insurer for eurozone governments. 
Other European Union funds are also understood to have supported the EFSF's bond sale....
At a private breakfast organised by PI Capital last week, Mark Hoban, the Treasury minister, said: "What it doesn't do is provide the next stage of the solution, which is how do you stop this from happening again?" he said. 
The move, by the European Investment Bank, will cause more disquiet among non-eurozone EU members who have become concerned about their growing exposure to the cost of rescuing the currency bloc.

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