From European Wire service, January 26, 2011:
“Frankfurt – European Financial Stability Facility (EFSF) today placed its inaugural bond for an amount of €5 billion as part of the EU/IMF financial support package agreed for Ireland.
The issuance spread was fixed at mid-swap plus 6 basis points. This implies borrowing costs for EFSF of 2.89%. Investor interest was exceptionally strong, a record breaking order book of €44.5 billion from more than 500 investors. Investor demand came from around the world and from all types of institutions.
Very strong demand came from Asia. The Government of Japan purchased over 20% of the issue, reflecting its early commitment with the intention of contributing to European financial stability.
Klaus Regling, EFSF’s CEO commented: “I am delighted with the outcome of our inaugural issue. The huge investor interest confirms confidence in the strategy adopted to restore financial stability in the euro area."
Citi, HSBC and Société Générale acted as lead managers for this first EFSF issue and Deutsche Finanzagentur, the German Debt Management Office, acted as Issuance Agent. Klaus Regling expressed his gratitude to all participants for the successful placement of EFSF’s first issue.
The funds will be disbursed to Ireland on 1 February (5 business days settlement). This will match Ireland’s request for a loan of €3.3 billion. The difference between the amount raised on the markets and the amount disbursed to Ireland is due to EFSF’s credit enhancements using a cash reserve and loan-specific cash buffer to secure a triple A rating.
The cash reserve comprises a margin rate and a one-off service fee. It is also explained by EFSF’s structure which requires both the principal and interest to be covered by guarantees. The final cost charged to Ireland and the exact loan amount will only be known once the cash reserve and the loan specific cash buffer, which are retained by EFSF, have been reinvested.”
As the above wire report makes clear the scandal surrounding Ireland’s IMF/EU bailout continues to gather momentum following the collapse of Brian Cowen’s position as Taoiseach (Prime Minister) of Ireland.
There are now growing calls for the resignation of Mr. Paddy Honohan, the embattled Governor of the Irish Central bank, due to the fact that he was the lead negotiator during the disastrous bailout talks.
It turns out that even though the EFSF is borrowing funds at 2.89%, Ireland is in effect being charge nearly 9%. This is a higher rate charged on come credit cards in mainland Luxemburg where the private EFSF is based (it is a structured investment vehicle a la Enron fame).
Ostensibly Ireland is paying approximately 6% but in fact the Emerald Isle will receive only 66% of funds raised, though taxpayers must fully guarantee 100% of the principal and interest. Thus when you add fees and funds withheld the real rate, according to my math, is 9% approx.
Clearly something went wrong and it looks like heads are set to roll.
It is expected that Brian Cowen will dissolve the Irish Parliament before next Wednesday, February 2nd. The election campaign that will follow is set to be one of the most contentious in living memory with implications for the future of the Irish parliamentary system and the stability of the wider Euro project.
Watch this space folks it’s going to be a wild ride.
*Christopher Quigley is a financial expert and commentator. His email is firstname.lastname@example.org