Treasury Today Country Profiles in association with Citi

EU raises €5 billion for Ireland

Under the auspices of the European Financial Stability Mechanism (EFSM), the European Commission issued a €5 billion bond on Wednesday 5th January. The funds raised will be lent on to Ireland.

The Commission will pay interest of 2.59% on the bond, while the Irish government will pay a rate of 5.51% – a 2.92% margin. It is expected that the profit will be added to the EU’s budget. This five-year debt is the first installment of €50 billion in bonds which will be used to fund Ireland.

Investors took advantage of the low risk – the issuance was more than three times over-subscribed. With an AAA rating, the bond compares well with the debt of countries like Portugal and Spain, with ratings of A1 and Aa1 respectively, both of which are ‘on review’ by agencies. Furthermore, this EU issuance comes with a yield 70 basis points above that on German bonds.

The EFSM was established in May 2010 to offer credit to troubled EU countries, up to an expected maximum of €60 billion. However, the European Commission denies such help constitutes a bailout, claiming at the time, “This mechanism would allow the provision of loans, not grants. Loans have to be repaid with interest.”

TT Insight

The bonds’ popularity has prompted some concerns that the EU’s fund raising could pull investors away from the already fragile debt markets for weaker Eurozone states. With a Reuters poll of economists already predicting Portugal will need a bailout, and expecting a downgrade for the country’s debt before the end of this quarter, that can only be worrying news for those countries.

Since it was initially established “to preserve the stability, unity and integrity of the European Union… [providing] assistance to any member state which is experiencing or is seriously threatened with a severe economic or financial disturbance caused by exceptional occurrences beyond its control”, the success of the EFSM’s tactics will come under intense scrutiny if more countries require bailouts in the near future.