–Corrects 1st Paragraph To Show Mkt Moves Were Wednesday, Not Tuesday

FRANKFURT (MNI) – Spreads on peripheral Eurozone sovereign debt
widened Wednesday morning, in part because of a research report
indicating that the European Financial Stability Facility might be more
limited in its lending capacity than previously thought.

Also weighing on market sentiment are the upcoming Portuguese
auctions of four- and ten-year bonds, the results of which are due later
this morning.

Portugal’s 10-year spread against German Bunds was trading this
morning nine basis points wider at +395, having earlier retested a
record high of +398bps that was set on Monday. Ireland’s 10-year spread
was 13 basis points wider at +409, still below Monday’s record of +418.

Greece’s ten-year spread widened in early trading to +892 basis
before tightening back to +884, unchanged from Tuesday.

Traders said today’s market moves were at least partly in reaction
to a research report by the Royal Bank of Scotland that said the EFSF
could only lend E250 billion if it wanted to retain the AAA credit
rating assigned to it by all three ratings agencies on Monday.

In the worst case — and unlikely — scenario where Ireland,
Portugal, Spain and Italy all tapped the facility simultaneously, its
total lending ability would be reduced to E212 billion, not enough to
cover those countries’ coupons and redemptions for 2011, the RBS report
concluded.

However, supplementary funding would likely be made available by
the IMF, which created a standby facility specifically for Eurozone
countries to complement the EFSF.

At the height of the Eurozone debt crisis in May, European leaders
created the EFSF and authorized it for issuance of up to E440 billion. A
pre-existing EU fund of E60 billion and an IMF pledge of up to E250
billion bring total authorization for financially troubled EMU states to
E750 billion.

The scenarios in the RBS report are based on the principle that for
the facility to maintain its AAA rating, it must maintain guarantees for
120% of the debt it issues.

“The actual loans available would be less than the total debt
issuance due to the 120% guarantees provided by different nations and
the need for a cash reserve and/or potentially cash buffer (assuming
EFSF would want to maintain its triple-A status,” RBS explained.

If more countries needed to tap the facility, then its maximum
guarantee exposure would likely fall, because countries tapping the
facility cannot be guarantors, RBS said. This eventuality would reduce
the total amount of loans available, and maximum issuance.

If the scenario ever materializes in which Ireland, Portugal, Spain
and Italy all have to tap the rescue fund at the same time, “then the
total guarantee exposure will fall to E278bn, which would mean that if
EFSF wanted to keep the triple-A rating it would only be able to provide
loans of E212bn and could issue debt only up to E232bn,” RBS said.

While this amount would not cover total 2011 coupons and
redemptions for the four countries mentioned, the scenario does not
include possible help from the IMF, RBS noted.

Given the IMF’s E250 billion commitment to helping the Eurozone, it
is hard to believe that the Fund would stay on the sidelines should
countries come calling to the EFSF.

EFSF Chief Executive Klaus Regling has said repeatedly in recent
comments that he does not expect his facility ever to be tapped.

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