The financial troubles in the European Union (EU) are far from over. On November 29, leaders of the 17 EU members unanimously agreed to significantly up the bailout fund. The outcome however strayed away from stating by what amount the fund will be spruced up too. The European Financial Stability Facility (EFSF), a special purpose vehicle managing the fund also said that apart from raising money from foreign investors, it is also possible that the EFSF may seek help from the International Monetary Fund (IMF).
The Finer Details
The delegates from 17 EU member countries though refused to state the exact amount to be raised, it is estimated that the bailout corpus my go up by 20 to 30 percent in the near future. For this, countries worst affected by the sovereign debt crisis namely Portugal, Italy, Ireland, Greece, and Spain (PIIGS) would be issuing new leverage bonds to raise additional funds. These are countries who did not save for a rainy day, have set up pension plans that are non-feasible, and who have mismanaged their finances. Moreover, new bonds will also be issued by the EFSF to raise the fund amount. The bonds will be available in the international market in January of 2012. The EFSF will also urge the IMF to raise additional funds for the debt ridden EU to avoid another bout of recession.
Sovereign investors increasingly are becoming reluctant to dirty their hands any more in the European bailout fund. China, which is one of the biggest sovereign investors in America and Europe, is grappling with a hoard of financial problems in its own backyard. There however might be a reason that investors may come back to investing in sovereign bonds.
Italy, which was offering 4.93 percent yield on 3-year bonds, is now luring investors with 7.89 percent yields. There may be some major takers now but there is alarming risk because if Italy goes under, investors will be the ones caught with their hands in the cookie jar. On a 10-year bond, the yield has been hiked from 6.06 percent to 7.56 percent. The yield rates are significantly higher than what Portugal, Ireland, and Spain offered forcibly due to pressure from the EFSF. How willing the investors now are is yet be seen. Rumors are abound that the AAA rating awarded to France may turn to negative, which may further impede the efforts of the EU to raise more sovereign funds.
The EFSF will be releasing the next installment on the 8 billion euro to Greece so that there is no immediate threat of Greece defaulting on its loans. This is the sixth round of funding Greece will receive from the joint EFSF-IMF fund. To be released in mid-December, the fund will be partly funded by the IMF. The EFSF aims to raise close to 1 trillion euros; however considering the present investor sentiments, the EFSF is pitching the IMF to raise the necessary amount from sovereign investors. Raising the money from private investors was also mulled, but it would be too tedious and would need three times more time to meet the target amount. It does not matter if Greece and these other European countries find the money donors, if they do not alter their financial and pension system, they will fail in the long run.
The IMF is Present and Accounted For
As Germany is reluctant to rope in the European Central Bank (ECB) as the lender to the EFSF, the only option in front of the EFSF is to reroute the money from the ECB to the IMF and then to the beleaguered countries coinciding with the terms and conditions prescribed by the IMF. This move will also provide an additional sense of security to European Bailout Bond buyers since the IMF will also be involved.