International investors wary about EFSF, says Ignis' Thomson

11 January 2012 | By Gary Jackson

According to Stuart Thomson, chief economist at Ignis Asset Management, factors such as “incompetence” in boosting the rescue fund’s firepower, warnings on its credit rating and a potential downgrade of France are creating reluctance to buy new EFSF-issued debt.

On February 4, a €3 billion (£2.5 billion) three-year benchmark bond in support of the Irish and Portuguese bailout deals was successfully placed by the fund.

Close to €4.5 billion in orders from around the globe were placed for the bond, a statement from the fund revealed. Christophe Frankel, deputy chief executive and chief financial officer of the EFSF, said this shows that the fund has “established itself as a quality supranational issuer”.

However, data breaking down the buyers of the bond show the majority come from the eurozone itself, significantly more than in previous auctions.

Some 76% of buyers last week were based in the eurozone, compared with 47% in November’s ten-year bond auction in support of Ireland and 33% in June’s five-year bond in support of Portugal.

The proportion of Asian buyers almost halved in the recent action, dropping from 23% in November to 12%. Only 4% originated from the UK, falling from 14% before.

Thomson says: “International reserve managers are clearly more wary of supporting this issue given the question marks hanging over its rating and leverage.

“European politicians’ attempts to leverage up the EFSF could have been scripted by the Keystone Cops and nothing damages sentiment like incompetence.”

December saw both Standard & Poor’s and Fitch warn that the EFSF’s top credit rating is at risk. The facility’s rating could be compromised if those of its contributors, especially France and Germany, are downgraded.

Thomson, deputy manager of the Ignis Absolute Return Government Bond fund, suggests speculation that France will lose its AAA rating may have influenced international investors at the recent auction.

“Investors are awaiting the inevitable downgrade of France with bated breath. The timing of this move is both uncertain and highly political,” he says.

“Political sensitivities are particularly elevated given the impact that any downgrade will have on EFSF funding and leverage, as well as the forthcoming French presidential election in May.”

France is due to report preliminary fourth-quarter GDP on February 15 and leading indicators suggest this will show the economy contracted at the end of the year.

Thomson predicts that contraction will also be seen in the opening quarter of this year, meaning France is in technical recession and adding weight to the likelihood of a ratings downgrade.

“The downgrade will reduce the size of the EFSF and increase the pressure on Germany to assume greater responsibility for the contingent liabilities of the periphery,” the economist continues.  “The so-called bazooka is a pea shooter.”

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