10Y EFSF-German, French-German Spreads Rising; S&P Lowers EFSF Outlook

Live source: Thomson Reuters
On February 14, when Moody's affirmed its stable outlook and Aaa rating on EFSF debt, I told you to watch this Thomson Reuters chart (updates daily here) with the 10-year EFSF-German bund yield spread and 10-year French-German bund yield spread. Since then, it looks like the EFSF-German yield spread broke through a downtrend line and the French-German yield spread is now testing downtrend resistance. I'm not sure if the chart is linear or logarithmic, but check out the chart with trend lines to see what is happening. On January 17, S&P downgraded France and the EFSF's credit rating to 'AA+' from 'AAA' and lowered France and Austria's outlook to negative, which was the precursor to yesterday's action.

The EFSF, or European Financial Stability Facility, is a temporary bailout fund which is 29.07% guaranteed by Germany, 21.83% by France, 19.18% by Italy and 12.75% by Spain (Netherlands, Austria and Belgium back <13% combined). This is the amended allocation. The ESM, or European Stability Mechanism, is the permanent bailout fund that is expected to arrive in July. See the EFSF document for more info.

If all goes well with the Greek debt exchange with the PSI ("private sector involvement"), EFSF funds will be released to bailout Greece with austerity measures attached, which will avoid a hard default on March 20 when a 14 billion euro debt payment is due. Here is more information: Feb 21, 2012: Eurogroup Statement on €130B Greek Bailout, PSI Exchange (EUR/USD Charts). I also found a nice write up by Heidi Moore at MarketPlace on the details of the debt exchange. And what about the holders of Greek CDS? Very interesting.

So, yesterday S&P lowered its outlook on EFSF to negative, after lowering France and Austria to negative on January 17. Here is the summary from Reuters.


-- We have concluded that credit enhancements sufficient to offset what we view as the reduced creditworthiness of European Financial Stability Facility (EFSF) guarantors are not likely to be forthcoming.

-- We are therefore revising the outlook on the long-term rating on the EFSF to negative from developing and affirming the 'AA+/A-1+' ratings.

-- The negative outlook on the long-term rating mirrors the negative outlooks of France and Austria."

The EFSF-German bund yield spread was already pricing in heightened credit risk by widening. As was the French-German yield spread. Everything is known, or priced in, unless the debt exchange fails and Greece sees a hard default. The next LTRO will help backstop a liquidity crisis, but going forward, which country in the eurozone will tap bailout funds next, Portugal?.

Links on Greece, the EFSF, ESM and LTRO:
Euro Leaders Delay Decision on Bigger Bailout Fund (AP at ABC)
French parliament ratifies new eurozone rescue fund (AAP, ninemsn)
German EFSF Panel's Powers Limited to Bond Sales by Court (SF Gate/Bloomberg News)
ISDA To Hold First Greek Default Determination Hearing On March 1 (Zero Hedge)
Fitch on who’ll tap the LTRO - (FT Alphaville)
Focus Turns Now to Greek CDS Payouts (WSJ)
So Greece “Defaults” And Europe Moves On… (TF Market Advisors)
That Greek debt sustainability analysis in full (FT Alphaville)