Commission says EFSF bond buying an option
By Sarah Collins | Wednesday 20 June 2012
The European Commission has said that eurozone rescue funds could buy the bonds of stressed member states, such as Spain and Italy, on the open market, but insists that no formal application from either country has been received. The exercise, which mirrors the European Central Bank’s Securities Markets Programme, was added to the arsenal of the European Financial Stability Facility, the eurozone’s existing €440 billion rescue fund, last year. “There is no plan, no formal request yet, we’re just thinking about what instruments might actually be useful for relieving the tensions on the market,” said a spokesman for Economic Affairs Commissioner Olli Rehn, on 20 June, after reports surfaced that the issue had been discussed at the G20 meeting in Los Cabos, Mexico. “But we’re talking here about financial paracetamols - it may alleviate the tension, pain or unease for a while but it does not address the causes which are at the root of the structural problems you find in the Italian economy, the Spanish economy or any other economy,” he said.
The ECB has spent €212 billion propping up government bond prices in Greece, Ireland, Portugal, Italy and Spain since May 2010, but suspended its bond buying programme in April, urging eurozone governments to do more to strengthen their own economies. The EFSF’s bond buying would be capped at a similar amount given it has only around €250 billion left to spend after bailing out Greece, Portugal and Ireland. It has also earmarked up to €100 billion for a Spanish bank bailout, which would likely transfer to the ESM once it is formally requested.
On 20 June, the EFSF auctioned off its first seven-year bond for €1 billion, offering investors a yield of 2.409%.
EFSF bond buying: The rules
Under EFSF guidelines, the fund can purchase sovereign bonds in secondary (open) markets as well as primary markets (where bonds are first issued by governments).
Eligibility: A country must face “exceptional financial circumstances and risks to financial stability” in order to qualify for the secondary markets programme (SMP). A decision would be based on an ECB report and advice.
Conditions: Countries tapping this kind of support and not already under a bailout programme must sign a memorandum of understanding with the EU and commit to certain conditions. These could include: respecting EU debt and deficit limits under the Stability and Growth Pact, maintaining a “sustainable public debt,” keeping to commitment under the excessive imbalances procedure (on wages, asset prices and unemployment levels, among other things), and must not display persistent lack of market access or harbour insolvent banks.
Bonds: The EFSF can sell the bonds back to the market, hold them to maturity (like the ECB), sell them back to the ailing member state or sell and buy them back (repurchase) from banks to aid liquidity.