European Union officials have come to an agreement on the region’s new permanent bailout mechanism ahead of the March 24-25 summit. The deal for the European Stability Mechanism is as follows:
- Expansion to €700 billion (nearly $1 trillion)
- €620 billion in callable capital; €80 billion in capital paid in by member states
- Effective July 2013
- If you tap the fund, you pay a 3% premium for a 3-year loan; additional 1% for more years
At first look, this deal seems great news for eurozone bondholders and sovereigns. You now have a backstop behind states like Ireland and Greece, and interest rates on future bailout loans will be lower than those available now.
But it’s not all good news for eurozone bondholders, according to SocGen’s Michala Marcussen:
Both Greek and Irish bond markets have effectively shut down since these countries received assistance. With the EU/IMF securing funding over a multi-year period, there is no real need for these countries to return to debt markets. But, as the loans come in tranches there is nothing that prevents this either. The determining factor is market yields. The 10 year yield is currently on the screens at 12.00% for Greece and 9.29% for Ireland. Clearly these levels are unattractive, and in our opinion reflect that: (1) neither Greece nor Ireland have sustainable public debt trajectories and, as such restructuring risk remains high; and, (2) effective in June 2013, the claims of private creditors will be subordinate to those of the ESM.
So while there might be much positivity around the completion of the ESM and all the other deals thrashed out at this meeting, it still hasn’t dealt with the underlying problems facing Greece and Ireland (not to mention Portugal). Those countries still clearly need to restructure, as muddling through doesn’t look like it will be enough. So bond holders should be only somewhat happy as a result of this news.