Debt woes could grow in peripheral Europe as battle for funds heats up

Europe’s most indebted nations, already struggling to find buyers for their bonds, will face more competition as the region begins issuing new securities to fund Ireland’s rescue package. The European Financial Stabilization Mechanism (EFSM) and European Financial Stability Facility (EFSF) will raise as much as 34.1 billion euros ($44.6 billion) for Ireland in 2011, the European Commission said on December 21. So-called peripheral nations also will vie for funds against AAA-rated Germany and France, which plan to sell a combined 486 billion euros of debt next year. Spain’s funding needs are 90 billion euros and Portugal may require 19 billion, analysts at Credit Agricole SA estimate. Portuguese 10-year bond yields rose by almost half a percentage point in the past two weeks as investors bet the country will follow Ireland in seeking aid after European Union officials deferred a decision on whether to let the EFSF buy bonds of the most indebted countries. EU leaders also failed to agree on topping up the temporary 750-billion-euro emergency fund of which the EFSM and the EFSF form the main pillar. «The crowding-out effect is a big problem for Spain as they have to come to the market pretty quickly and they have lots to do,» said Orlando Green, assistant director of capital markets strategy at Credit Agricole Corporate & Investment Bank in London. «The funding conditions are going to be tough until there’s more certainty in terms of support for troubled sovereigns.» Ignis Asset Management, UBI Pramerica SGR SpA and Robeco Groep NV, which together manage about $340 billion, say they will shun bonds from peripheral nations until policymakers come up with a more credible solution to the debt crisis. Spanish government securities dropped 4.8 percent in 2010, headed for their worst year since at least 1993, according to indices from Bank of America Corp’s Merrill Lynch unit. Portuguese notes declined 8.2 percent in the same period. The EFSM and EFSF together are providing 40.2 billion euros of Ireland’s 85-billion-euro rescue. The EFSM’s share is 22.5 billion euros and the EFSF’s portion is 17.7 billion. In addition to the 2011 financing, the two funds will sell bonds to raise as much as 14.9 billion euros in 2012, the European Commission said on December 21. Most of the bonds will have maturities of five, seven and 10 years, according to the Commission. Next year, the EFSM and EFSF will issue a total of seven to eight benchmark bonds each worth 3-5 billion euros. The AAA credit ratings of the EFSF and EFSM mean bonds sold by them probably will be more attractive to investors than those from lower-ranked countries. The Luxembourg-based EFSF is overseen by euro-area governments and the EFSM is run by the Brussels-based European Commission. Portugal, which is rated A- by Standard & Poor’s, has to refinance 11.5 billion euros of treasury bills that come due in March and repay about 10 billion euros of bonds by June, according to Chiara Cremonesi, a London-based fixed-income strategist at UniCredit SpA. Portuguese bonds fell on December 21 after Moody’s Investors Service said it may cut the country’s credit rating «by a notch or two,» partly citing the «likely deterioration in debt affordability over the medium term.» Portugal posted the biggest shortfall in the 16-nation euro region last year after Ireland, Greece and Spain. On December 15 the ratings company put Spain’s Aa1 on review for a possible downgrade. «It’s likely that we haven’t seen the worst of the crisis,» said Emilio Franco, chief investment officer in Milan at UBI Pramerica, which manages about $48 billion. «We don’t exclude future debt restructurings in some of the weakest countries.» While EU leaders agreed to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013, they still need to iron out details of the plan and bridge divisions over immediate steps to stabilize bond markets. Debt is sold under the euro area’s financial backstop only after an aid request is made by a country. So far the only nation to tap the fund is Ireland, whose package also includes loans from the UK, Sweden, Denmark and the International Monetary Fund. Greece’s earlier 110-billion-euro rescue involved loans from euro-area governments and the IMF. Euro-area governments are debating whether to expand the role of the EFSF to allow it to buy the bonds of countries in need. The current mandate is to sell debt backed by 440 billion euros of national guarantees and use the money to offer aid. «We would like to see that policymakers are ahead of the game instead of only reacting when problems arise before we start being constructive in this market again,» said Kommer van Trigt, a money manager at Robeco in Rotterdam, which has about $182 billion in assets. «The sovereign credit problem isn’t going away anytime soon.»

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