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Wednesday, November 02, 2011 11:46 AM

EFSF Bond Sale Postponed Because of Market Conditions; Fake Haircuts, Fake Help

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When was the last time the Fed postponed a US treasury sale due to market condition? I cannot find one although it is possible it happened at some point in a debt ceiling issue.

Today Bloomberg reports the EFSF Delays 3 Billion-Euro Bond Sale simply because it does not like market conditions.

Europe’s bailout fund is delaying a 3 billion-euro ($4.1 billion) bond sale after Greek Prime Minister George Papandreou’s request for a referendum on the rescue pact for his country roiled markets.

The European Financial Stability Facility is putting off the 10-year issue “due to market conditions,” according to Luxembourg-based spokesman Christof Roche. The fund may wait for the outcome of the Nov. 3-4 Group of 20 summit in Cannes, France before selling the bonds, according to a person with knowledge of the matter.

“The developments around the G-20 in Cannes will have a big impact on the pricing of any issue,” said Christophe Herpet, a Paris-based fund manager at AXA Investment Managers, which oversees about $735 billion of assets.

The EFSF will use the proceeds of the bond sale to help finance Ireland’s rescue. The nation was the second euro-region country to be bailed out, after Greece and before Portugal. The fund said on Oct. 31 that it hired Barclays Capital, Credit Agricole CIB and JPMorgan Chase & Co. to manage the new issue.
Fake Haircuts

In response to the action by the EU on EFSF bonds, Peter Tchir at TF Market Advisors pinged me with this set of statements.
The EFSF pulling a 3 billion bond sale due to market conditions is pretty bad. These bonds are cleaner and safer than the binary default options the EFSF plans to be selling in the future.

Shouldn't the EFSF generally be expecting to issue in choppy market conditions?

It's like a fireman showing up at a house and refusing to fight the fire because, ah, um, ah that house is on fire and could be dangerous. Regling should spend some time focusing on the blocking and tackling of the EFSF. So far markets (equities in particular) are doing a good job of ignoring this, but not being able to sell at a decent rate, 3 billion of straight debt, doesn't bode well for selling a trillion of complex debt.

IIF is still working on the haircut - heck they even called Greece. It is now almost a week since the grand plan and all we know about the IIF deal is that it will be a 50% NPV reduction and help Greece's debt to GDP by 2020.

How about for every 100 euro of Greek debt you get 25 euro of some new Greek 4% coupon 5 year bond and 25 euro of a new 4.5% Greek 10 year bond? That is a real haircut and is easy.

At first I thought the IIF was tricking Merkozy but I now think they were in on the joke - just Greece and the citizens and Geithner fell for haircut headlines.
My only quibble with that analysis is that Geithner did not fall for fake haircuts, he actively promoted them. Otherwise it is spot on.

Fake Help

And note the preposterous and often repeated hype in the Bloomberg article the bond sale is to "help" Ireland.

No, it's not unless I add a few word to the sentence such as "the bond sale is to help rape Irish taxpayers". Ireland would be far better off right now if it had taken the Icelandic approach, calling for a national referendum, giving its voters the chance to tell the EU and IMF to go to hell.

I am sure they would have done so, just as Icelandic voters did.

Mike "Mish" Shedlock
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