First bonds for Irish bail-out issued

First bonds for Irish bail-out issued.
The EU has made a landmark issue of its first bail-out bonds, but a Portuguese bond auction showed that the euro zone debt crisis rumbles on despite a fresh pledge of support from China.

The European Financial Stability Mechanism (EFSM), which is under the auspices of the European Commission, raised €5 billion in its first placement of bonds to raise funds for Ireland's bail-out package.

The EU created the €60 billion EFSM and the larger €440 billion European Financial Stability Fund (EFSF) last year to fund bail-outs by tapping markets. The EFSF is expected to begin issuing bonds later this month.

The EFSF, whose bonds are guaranteed by stronger euro zone members, represents a groundbreaking shift in philosophy opening a precedent of structural rescue support for struggling members.

The yield, or return on investment, on the EFSM bonds was 2.5%, according to HSBC bank. This is above that paid by euro zone countries with solid finances but considerably lower than the 7.78% yield on Irish five-year bonds.

The EFSM bond placement is part of the €67.5 billion of aid Ireland is to receive under its EU-IMF bailout agreed in November last year. The two funds plan to raise up to €49 billion for Ireland in 2011 and 2012.

The EU established the EFSF last year at the height of the crisis over Greece, but the joint bond mechanism is set to continue under permanent rescue facilities which EU members are set to finalise this year.

Some euro zone members, lead by Eurogroup chief Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti, have called for the practice of issuing joint bonds to be expanded to allow struggling members to tap lower financing rates before the market forces them to take a bail-out. German Chancellor Angela Merkel has led opposition to the proposal.

Germany successfully placed its first bond issue of 2011 today, reaffirming its safe haven status after several sales fell short late last year amid heightened tension on sovereign debt markets owing to problems in Ireland.

The Bundesbank said it took in €3.9 billion in exchange for benchmark 10-year Bunds at an average rate or yield of 2.87% after receiving bids worth a total of €6.29 billion.

But an auction by Portugal showed that investor concerns about European debt and deficit levels is far from over, as Lisbon was forced to pay sharply higher yields in its first foray onto the bond market this year.

Portugal raised €500m with a placement of six-month treasury bills, but the yield rose to a new record of 3.686% against 2.045% in the previous auction, according to data from Portugal's IGCP state debt management agency.

The jump in Portuguese yields came despite Vice Premier Li Keqiang's pledging to help Europe in its sovereign debt struggle during.

Li opened a three-nation tour of Europe on Tuesday by promising to use China's world record foreign reserves to buy more Spanish debt when he met Spanish Finance Minister Elena Salgado.

Swiss central bank excludes Irish bonds

The Swiss National Bank has stopped accepting Irish government bonds as collateral in its money market operations.

The SNB excluded euro-denominated Irish government bonds on December 21, a list of changes to eligible collateral for the SNB's liquidity-providing money market operations showed.

Analysts said that although the move could affect sentiment towards Irish bonds, it would not have a direct impact as Ireland is being funded by the EU/IMF package. The yield on Irish bonds was little changed.

Analysts said that the attitude of the European Central Bank was much more important, and the ECB had made it clear it would continue to accept Irish bonds.

For Switzerland, however, Irish government bonds 'did not meet the quality criteria anymore', SNB spokesman Werner Abegg said.

According to the bank's website it had stopped accepting government bonds from Greece in April, one month before that country was forced to seek outside help to manage its finances.
Ireland agreed to a bail-out in November.

SNB guidelines for collateral require that securities in foreign currency have a minimum rating of AA-/Aa3. Securities issued by sovereign countries and central banks can be exempted from this requirement, as occurred in the case of Ireland, whose top sovereign rating was already below that ceiling.

Though outside the European Union, Switzerland has been hit by fallout from the European debt crisis with waning confidence in the euro sending the Swiss franc to record highs, hitting the country's exporters.

The SNB has highlighted in the past that, unlike the European Central Bank, it has not cut its minimum standards for collateral during the financial crisis.

Ireland's credit status took a big hit from ratings agencies late last year. Moody's slashed its rating by five notches to Baa1 - three notches above junk status - from Aa2 and warned further downgrades could follow if Ireland was unable to stabilise its debt.

Source: www.rte.ie