The EFSF to Buy Distressed Debt? It Could Happen!

(eToro Blog) In a recent interview, Benoît Cœuré, a member of the European Central Bank’s executive board, remarked that he found it surprising that not one of the Eurozone’s governments had yet requested that the European Financial Stability Facility (EFSF), aka the bailout fund, buy sovereign bonds from the open market. Especially in the case of Spain and Italy, he believes that that would go a long way to reduce the severe strains on their respective governments. According to him, the rules that govern both the EFSF and the European Stability Mechanism (ESM) allow for the purchase of sovereign debt provided it gets the backing of the ECB, and given the current situation that backing could easily be justified.

France’s President Francois Hollande is supportive of the idea, saying that those “virtuous” governments which have taken steps at fiscal reform should be able to consider the rescue funds as an option. However, German Chancellor Angela Merkel is generally cool on the idea and said that while the rules do allow it theoretically, it’s not an issue currently under discussion. That may soon change however, as the Italian Prime Minister, Mario Monti, has said that he would consider tapping the EFSF, which has a fund balance of €440 billion and intends to look into that possibility.

The EUR/USD is lower at 1.2671, attributed in part to a spate of disappointing PMI data. Markit Economics reported that Germany’s preliminary June reading for manufacturing PMI fell to 44.7 from May’s 45.2, while the services sector PMI fell to 50.3 from 51.8, below expectations. The data for the EMU was not much better; June’s preliminary reading for manufacturing slipped to 44.8 from 45.1, below the consensus forecast. The services sector PMI managed to eke out an unexpectedly improved reading, albeit by a very small extent, moving from 46.7 to 46.8.

Sentiment on OpenBook’s EUR/USD is generally bullish, with 57% buying to 43% selling. OpenBook trader Gcsdmm from China started trading on OpenBook only a few months ago, and already has 29 copiers and 373 followers to his credit. For the week, the trader’s P&L was in the green at 4.5%, and all of the 31 trades executed during that week were profitable. The trader earlier closed several long positions in the pair, some of them self originated but a fair number copied from OpenBook guru pyruss who has seen an increase in the numbers of copiers to 712 while followers amount to 6648.

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