Don’t sink the lifeboat

11 October 2011 By Neil Unmack Follow @unmack1

Politicians are pinning their hopes on the European Financial Stability Facility to help recapitalise banks and support Italy. However, investors are already demanding wider spreads to buy the bailout fund’s debt. This could make the euro zone’s rescue plan harder to pull off.

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Bonds issued by the European Financial Stability Facility have started to underperform comparable debt in recent weeks, as euro zone politicians seek to enhance the bailout fund’s powers and use it to help recapitalise banks.
The EFSF’s five-year bonds now yield about 2.4 percent, or 115 basis points more than comparable German government bonds.
That spread is 40 basis points wider than the closest comparable issuer, the European Financial Stability Mechanism (EFSM).
Until recently, EFSF bonds traded at similar spreads to those issued by the EFSM.

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