By Jack Duffy

PARIS (MNI) – Hopes in the Eurozone periphery that Europe’s rescue
funds could ease their borrowing costs by large-scale intervention in
secondary markets are fading because of the lack of financial firepower
and opposition by some northern EMU members to the plan.

EU leaders decided at their June 29 summit to use the funds, the
temporary European Financial Stability Facility and the permanent
European Stability Mechanism, in a “flexible and efficient” manner to
stabilize the borrowing costs of countries like Italy and Spain.

But with the delay in the start-up of the ESM until September at
the earliest because of the case before Germany’s Constitutional Court,
only the EFSF is in ready to take such action. But it lacks the funds to
do so convincingly, analysts said.

Elizabeth Afseth, market analyst at Investec, notes that the E440
billion EFSF has already made commitments worth E323.3 billion to
Greece, Ireland, Portugal and Spain. That leaves about E116 billion, not
counting a bailout for Cyprus that is being prepared. When the ECB was
actively buying Spanish and Italian bonds last summer it was shelling
out E10-15 billion a week.

Bond market intervention via the EFSF is “just an invitation to
investors to sell before the money runs out,” she said.

While Italian Prime Minister Mario Monti declared that the decision
at the June 29 summit to use the funds was unanimous, that solidarity
has split along a north-south divide in recent weeks.

Monti argued that “virtuous” countries should have the ability to
call on the funds to bring rates that are not in line with economic
fundamentals back to “coherent” levels.

But Bundesbank President Jens Weidmann said in a weekend newspaper
interview that high borrowing costs in themselves were not sufficient to
warrant intervention. Aid, he said, should only come as a last resort
when other options have been exhausted. “I don’t see Italy in that
situation,” he said.

Finland and the Netherlands have also expressed doubts about the
plan, threatening to block secondary market bond purchases by the ESM.
Since unanimous backing of contributing countries is normally required
for financial support from the ESM, such opposition would require the
fund to treat market intervention as “urgent,” which would allow
decisions to be taken by a qualified majority of 85% of the voting
rights.

Italian 10-year yields, which dipped to a low of around 5.65% after
the June 29 summit have climbed back to around 6.15%. Spain’s 10-year
bonds were yielding 6.82% late Monday, up from a post-summit low of
around 6.30%

Some details of the intervention plan have become clearer since the
summit. The secondary market intervention can be initiated either by the
country itself, by making a request to the Eurogroup, or by the European
Central Bank, which can issue an “early warning” of problem market
conditions, according to an updated investor presentation published on
the EFSF Web site last week.

In either case, the EFSF said, the ECB will have back up the
request by issuing a report “identifying risk to euro area and assessing
need for intervention.”

Countries like Italy not in formal bailout programs won’t face new
conditions by requesting support, but must pledge “continued compliance”
to existing EU surveillance programs like the European Semester, the
Stability and Growth Pact and the Macroeconomic Imbalances Procedure.

Countries with adjustment programs must satisfy the conditions in
the memorandums of understanding they signed to receive the bailouts. On
that basis, Portugal and Ireland, which are largely in compliance with
their MOUs, might be able to request intervention to lower their
borrowing costs, while Greece in all likelihood could not.

An eventual approval of the ESM by the German Constitutional Court
would ease concerns over the firepower behind the bond intervention
plan, but is unlikely to remove them. The ESM’s lending capacity has
been capped at E500 billion and its capital of E80 billion won’t be
fully paid in until the first half of 2014.

“If and when the ESM is finally up and running, given its limited
size, its interventions will merely provide another platform for foreign
investors to reduce further their exposure to the euro area’s
periphery,” Daiwa Capital Markets economist Tobias Blattner said in a
recent blog post.

–Paris newsroom, +33142715540; jduffy@marketnews.com

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