What Have We Learned?

by Nicole Gelinas

Europe’s structured-finance bailout fund — the European Financial Stability Facility (EFCF) — likely will issue bonds next month to fund the Irish rescue. Said one bond analyst about the new debt’s prospects in the marketplace (according to the FT):

It is risk-free and will offer a spread over Germany.

In other words, a free lunch! The new bond will (probably) offer a higher interest rate to investors than does Germany’s sterling national debt, but for no risk!

In reality, the new EFSF debt is not risk-free.

Investors should wonder why Germany, France, and the others have created the EFCF, a complex new structure, through which to issue the bailout debt.

Germany, after all, had a big hand in structuring this new facility. Why didn’t Germany simply ask each country to raise its own national debt to come up with its share, and pool that money in the fund? From the perspective of Germany and France, it would be cheaper and faster.

Europe’s stronger nations have a reason, though, why they would rather pay a little more in interest and fees now through their Structured Bailout Vehicle. 

Europe is buying something valuable with that extra “risk-free spread”: more time before stronger nations must determine to what extent they want to put their precious sovereign credit directly on the line to protect weaker nations.

Nicole Gelinas is contributing editor to the Manhattan Institute’s City Journal.