14.11.2011

By Simon Miller

Moody's has called into doubt the European Financial Stability Facility's (EFSF) ability to fund itself.

Following last Monday's €3bn (£2.57bn) 10-year bond issuance by the EFSF, the ratings agency said that the weak demand for the sale called into question "the ability of the EFSF to fund itself in the markets at low cost."

It added: "The success of the EFSF as a tool to stabalise sovereign debt prices and the success of the current euro area-wide support mechanism comes into doubt if that ability is compromised."

Moody's weekly outlook said that these concerns were amplifed by a lack of progress of the leveraging proposals put forward by eurozone leaders.

In addition, the suggested 20% protection on investment proposed would not necessarily cover investors in case of deafult.

Moody's added: "As a consequence, the proposals are unlikely to generate greater demand for euro area sovereign debt."

The comments in Moody's weekly outlook follows strong denial by the EFSF that it was forced to buy its own bond issuance.

Newspaper reports suggested that the EFSF had to step in to raise the €3bn.

According to the Sunday Telegraph: "Sources said the EFSF had spent more than €100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt."

However, an EFSF spokesman told Reuters: "The EFSF did not buy its own bonds and the book was €3bn.”

Moody's outlook concluded: "With its current lending capacity (which is about €266bn considering committments to Ireland, Portugal and Greece), the EFSF cannot meaningfully support the euro area's large government bond markets. This limits the EFSF's role as an important pillar of the euro area crisis management strategy."