Eurozone bailout fund buys its own bonds
14 Nov 2011
In a seemingly odd turn of events, Europe's €1-trillion rescue fund, the European Financial Stability Facility (EFSF) has been forced to buy its own debt with investors increasingly concerned over the worsening eurozone sovereign debt crisis.
According to the EFSF last week, it successfully sold a €3 billion 10-year bond in support of Ireland but The Sunday Telegraph newspaper said the target was only met after the EFSF bought several hundred million euros worth of the bonds.
According to sources, the EFSF had spent over €100 million buying up its own bonds to help it achieve its funding target after the banks leading the deal could only find about €2.7 billion of outside funds for the debt.
The revelation is likely to be seen as a major failure and a worrying sign for the future of the instrument after EFSF officials and their bankers travelled around the world for weeks trying to get on board key investors, including China's sovereign wealth fund and Japanese government funds, to buy its bonds.
Chinese and Japanese money was of key importance in last year's first bond sales by the EFSF, but they had since been dismayed by the eurozone's failure to resolve the worsening debt crisis and alarmed at how the fund had turned into a €1 trillion leveraged first-loss insurer for eurozone governments rather than a rescue facility for European banks.
Other EU funds have also been reported to be supportive of the the EFSF's bond sale. According to analysts, the failure of the EFSF would pile up pressure on the European Central Bank, to, in effect, assume the role of the lender of last resort for the eurozone, a move it had strongly resisted.
