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Asia invests in Spain FROB bond sale

Source: Reuters - Wed 26th Jan 2011

The success of Europe's first sovereign bailout fund has encouraged Spain's bank resolution agency to capitalise on improving confidence in the euro zone.

Yesterday's 5 billion euro bond from the European Financial Stability Facility (EFSF) generated in 44.5 billion euros of business, in the latest sign of confidence the bloc is getting to grips with debt issues that have troubled it for over a year.

Spain's 'Fund for the Orderly Regeneration of Banks' - FROB - announced plans for a further bond issue on yesterday and other borrowers are expected to use the momentum from the success of the EFSF deal.

Over 500 global accounts placed orders for the transaction, the borrower said, including major Asian central banks, the Japanese government in particular invsted over 20 %.

Today further demand had pushed the EFSF bond's spread tighter by about 7 basis points from where it priced on yesterday at mid-swaps plus 6 bps, a substantial move on a top-rated, highly liquid deal of this kind.

"EFSF broke records in the global capital markets for size of the order book for a single tranche transaction," said Philip Brown, head of public sector capital markets origination at Citigroup, which led the deal with HSBC and Societe Generale.

Commentators on the bond markets noted how there was a feeling that certain central banks had made an effort to support the euro zone's crisis mechanism. The 440 billion euro EFSF was set up in May last year after the Greek sovereign debt crisis to help any heavily-indebted euro zone member state unable to raise funding directly in the market.

Proceeds from this week's bond will be used to help finance the bailout of Ireland, which followed Greece last year in seeking a rescue package to aid the struggle against the collapse of its banking sector.

"The EFSF and EFSM (European Financial Stability Mechanism) transactions have both done well. It means the bailout mechanism works," said PJ Bye, head of public sector syndicate at HSBC./p>

The EFSF said its implied borrowing cost was 2.89 %, which was only 56 bps higher than the ultra-safe five-year benchmark German government bond.

Asian distribution accounted for 38 percent and central banks took 42 % of the bonds.

FROB, the restructuring fund for Spain's cajas is expected to sell three-year euro bonds later this week, having agreed to its second issue on yesterday.

"Investors were heavily underweight in their exposure to peripheral markets going into year end," said Citi's Brown, adding that investors had begun substantial rebalancing of portfolios towards non-core markets since the turn of the year.

The FROB has been the last resort for the cajas, but under a government recapitalisation plan, it will buy stakes in those that fail to attract private investment by September.

A significant volume of bad property loans with the cajas are seen as a significant risk for Spain, working to reduce its budget deficit to stave off fears it will need a bailout like Ireland or Greece.

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