THE GOVERNMENT will in the coming days borrow €3.5 billion from the euro zone bailout fund, about €200 million more than it first sought, following the completion of its inaugural bond issue.
Dublin initially asked for a €3.3 billion loan from the European Financial Stability Facility (EFSF). However, EFSF sources say “favourable” terms realised when it sold a €5 billion five-year bond last Tuesday mean it can now lend more than the sum the Government had asked for.
The bond issue was nine times oversubscribed, meaning investors signalled their willingness to put down a total of €44.5 billion.
The issue spread, fixed at mid-swap plus 6 basis points (0.06 percentage points), implied borrowing costs for EFSF of 2.89 per cent.
Ireland will pay interest of some 5.815 per cent for its loan thanks to the 2.925 per cent “surcharge” over the EFSF’s borrowing rate.
The inaugural loan to Ireland from the fund, which is controlled by the 17 euro countries, comes as EU leaders prepare to discuss a radical expansion of its remit at a summit in Brussels next Friday.
EU leaders will discuss the possibility of reducing this rate at the summit, but no final decision is expected until another summit late in March when EU leaders are expected to sign off on a range of EFSF reforms.
The EFSF’s rules means it must borrow more on the back of guarantees from euro zone countries than it lends on to bailout recipients.
This arises because it is obliged to maintain a large cash buffer to secure the triple-A credit rating over all its borrowings which enables it to issue bonds on the capital markets at preferential rates.
The protection of the cash buffer is required because only six of the euro zone countries are triple-A rated – Germany, France, Austria, Finland, the Netherlands and Luxembourg – and because the EFSF guarantees both the principal and the interest on the bailout loans it issues.
The EFSF sources said the “loan specific cash buffer” linked to the €5 billion bond was less than forecast when the Government requested the loan because the bond was raised at a low price. Japan’s finance ministry subscribed for more than €1 billion of that issue, with Asian investors generally taking up 38 per cent of the issue.
German investors are believed to have taken 12 per cent of the issue, Nordic investors 9 per cent, French investors 7 per cent, Benelux-based investors 6 per cent and north Americans 2 per cent.
It is believed central banks bought 43 per cent, fund managers 31 per cent, commercial banks 13 per cent and insurers 6 per cent. Pension funds took 3 per cent.
The EFSF’s next bond issue for Ireland will be in the second quarter of the year, and it plans to tap the markets again in the third quarter.
Subject to market conditions, the fund may issue a 10-year bond between €3 billion and €5 billion when next it issues a bond.
The market for 10-year money is smaller than the five-year market.
Source: http://www.irishtimes.com
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