The emergency loan vehicle set up by eurozone countries to contain the region's sovereign debt problems will probably not need to be activated despite the steep rise in some bond spreads, its chief executive said.
In an interview with Reuters on Monday, Klaus Regling said gains in some peripheral eurozone countries' yield spreads against German bonds were market-driven, and that if the European Financial Stability Facility (EFSF) did decide to issue debt it would likely prove popular with investors.
On the day the EFSF — a borrowing vehicle established in May and backed by 440 billion euros ($576.22 billion) of euro zone government guarantees — received a triple A rating from all three main credit agencies, Regling said the fund was not considering any "mock" issues to establish itself on the markets.
"The central scenario for me and euro zone finance ministers is that we don't need to become operational," said Regling, a former European Commission official who also worked for the International Monetary Fund and the German finance ministry.
"It is only important to be here in case of need, but the central scenario is that there is no need. Then why should we raise funds? It would cost us money to keep these funds and that does not make sense," he said.
"We would only become operational at the request of a member state."
Eurozone countries set up the EFSF as a safety net for members of the single currency area to prevent the sovereign debt crisis, triggered by Greece, from spreading.
SPREADS UNDER PRESSURE
Regling said the recent spike in debt spreads in Ireland and Portugal were normal market fluctuations that did not change his expectation that the EFSF would not have to borrow.
"In a political process you have a few days with good news, a few days with bad news and markets react to that and sometimes overreact. So this is a normal process," he said.
"The EFSF was not set up to intervene because certain spreads go up or come down or reach a certain level," he said.
The key factor was what member states were doing to improve their creditworthiness, consolidate their fiscal deficits and strengthen their competitiveness.
As worries about funding Ireland's fragile banking sector resurfaced on Friday, a press report, later denied by authorities, suggested the country was close to seeking emergency finance from the European Union or IMF.
On Monday morning the 10-year Irish/German government bond yield spread hit a euro lifetime high of 412 basis points.
Developments in Ireland had some impact on Portugal, the other country eyed by some as a potential next Greece. The equivalent Portuguese spread also hit a euro lifetime high of 383 bps.
Traders said the European Central Bank had bought distressed sovereign debt at the end of the previous week in a bid to cap the gains in peripheral bond spreads.
Regling said that were the EFSF to issue debt instruments, he expected great interest from investors, especially after approval of the Basel III agreement that will introduce tougher capital requirements for banks.
"It is a good opportunity for investors to have something new, a new supranational asset, given that banks are looking for good investment opportunities particularly in the context of Basel III," Regling said.
"I am confident that the interest of investors would be huge if there were a need."
He dismissed the concerns of some economists that potential EFSF bond issuance could crowd out national debt, making it more difficult for some eurozone countries to borrow.
"On a net basis the supply of euro area debt would not go up, because we would replace the borrowing needs of a member state," Regling said.
Regling said the total amount of cash the EFSF could raise would be less than the 440 billion euros worth of guarantees.
"It would depend very much on the circumstances — which country asked for assistance, the share of that country is in the EFSF that you would have to deduct from the total because it would step out as a guarantor, the conditions of the loan, the maturity, the interest rate," he said.
"So it not possible to give a number, but it will be reduced from the 440 billion."
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