High demand for first euro bailout bonds

AN auction of the first region-wide Eurozone bonds was concluded within the hour yesterday, as the European Commission found itself inundated with demand for the five-year notes.

It sold the targeted amount of €5bn (£4.3bn), with the proceeds going to prop up the European Financial Stabilisation Mechanism (ESFM), the bailout fund that is part-funding Ireland’s rescue to the tune of €22.5bn.

The bonds were sold with a 2.5 per cent yield, compared to 1.8 per cent for equivalent German debt. Investors snapped up the new notes, which are perceived to be high-quality paper backed by Europe’s most stable economies but offered at a premium to reflect high yields in peripheral Eurozone nations such as Portugal and Greece.

The plan to issue region-wide bonds was announced last year in an attempt to slow the heady rise of bond yields across countries after Ireland was forced to apply for a bailout in November.

But the idea of introducing a more permanent region-wide eurobond, or “e-bond”, has proved controversial, with German chancellor Angela Merkel strongly opposing the idea.

Analysts at BNP Paribas said: “We believe that an e-bond is the right thing to do if linked with fiscal harmonisation within the EU.”

But they admitted that it “could be interpreted as a permanent subsidy for peripheral countries”.

A series of region-wide Eurozone bond auctions is expected this year.

Europe last year announced plans to issue €34bn in region-wide bonds this year in order to fund the Eurozone’s bailout funds.
Analysts expect a yield premium of one to two per cent over European Union debt.