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12 September 2011

FN: Default swaps could boost EFSF funding efforts


The European Financial Stability Fund faces a busy autumn. It has issued three bonds this year worth €13bn in total, but more are on the way. Its borrowing capacity has increased from €250bn last year to €440bn, but it may not be enough to cope with the growing number of weak eurozone credits.

Yields on 10-year Italian government bonds were still up at 5.54 per cent in the first week of September, while those of Spain were at 5.24 per cent. Both sovereigns trade at around 400 basis points in the five-year credit default swap market, while Portugal is back over 1,000bps and Ireland testing recent highs of 850bps. Such figures suggest more bailout money could be needed.

The EFSF is set to take over the ECB’s mantle as borrower of last resort once national approvals are in place. One thing that might make the EFSF’s debt more attractive is the development of a CDS market with the EFSF as a reference entity. It has been reported that the bid for EFSF bonds would be stronger if buyers could hedge the position in the CDS market. There is no reason why a CDS market could not develop with the EFSF as a reference entity.

The creation of an EFSF CDS could only be a matter of time. But eurozone authorities would be hostile to the introduction of greater volatility to EFSF bond prices. For this reason, perhaps, banks have been shy in creating a CDS market for the EFSF.

Full article (FN subscription required)



© Financial News


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