FRANKFURT (MNI) – There is no guarantee that the European Financial
Stability Facility will have a AAA rating, the facility’s director Klaus
Regling said at an event last week, the contents of which were published
Friday in Euroweek magazine.

However, it is not certain that activation of the facility by a
troubled country would necessarily cause volatile bond spreads to widen
in Europe, Regling argued.

The E440 billion facility was created in May by European Union
finance ministers to mollify markets by showing that if
fiscally-troubled peripheral countries such as Spain and Portugal needed
financial support, they would find it in the last resort. Along with a
pre-existing EU fund and money from the International Monetary Fund, the
total line of credit available for that purpose reaches E750 billion.

The facility, which has not yet been activated, will likely
primarily issue in euros. But Regling told an audience at the Frankfurt
event, hosted by DZ Bank, that the door remained open to issuance in
foreign currencies.

Though Regling has said that he wants the agency to have a AAA
rating, he told the audience that, “there is no guarantee of that.”

Pressed as to whether spreads would widen sharply in Europe if the
facility were actually called upon to provide financing, Regling said,
“I don’t think you can generalise. You’re talking about contagion risk,
which is a possibility, but it would really depend on the
circumstances.”

Carl Heinz Daube, the head of Germany’s Federal Finance Agency,
told the same audience: “The situation you describe will be totally new
for all market participants. At this stage it makes no sense to
speculate as to what would happen to spreads because we don’t know what
the circumstances leading up to a country calling for help will be.”
Daube’s agency would manage EFSF issuance, if there is any.

Regling said, “it’s important to understand that if the EFSF were
to come to the market, Europe’s net funding needs would not go up. Less
creditworthy borrowers would step out and be replaced by more
creditworthy ones,” he explained.

“Of course we don’t know what the numbers will be. But if the EFSF
does issue, it is reasonable to assume that it will do so in
sufficiently liquid volumes,” Daube assured.

Regling conceded that it is not yet certain if the EFSF would issue
only in euros. “We would probably issue predominantly in euros but that
would depend on market circumstances. All options are open.”

Asked if the EFSF would issue via auctions or syndications, Daube
mentioned that in the experience of the Finance Agency, when something
new is issued it is typically issued via syndication.

“The EFSF will use exactly the same technique. So when it launches
inaugural issues across various points on the curve I would strongly
recommend the use of syndication. Those bonds could then be tapped.”
Daube said.

On the issue of German borrowing this year, Daube said that
although this year’s borrowing requirement is “extremely high,” at
around E338 billion, “the bill to German taxpayers for servicing that
debt could be lower than last year.” This is a result of falling yields
on German securities, caused by investors’ flight to quality amid the
crisis.

–Frankfurt bureau; +49-69-720142; frankfurt@marketnews.com

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