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Analysis

ESM expands into dollar market

Mitigating liquidity risk through investor diversification

by Kalin Anev Janse in Luxembourg

Thu 16 Nov 2017

This autumn, the European Stability Mechanism turned five years old. This coincided with the ESM's debut bond deal in the dollar market, with which it raised $3bn.

The ESM is a young institution, but a mature capital market player. Together with its temporary predecessor, the European Financial Stability Facility, it is one of the largest issuers of euro-denominated bonds. The EFSF/ESM have more than €250bn in bonds and bills outstanding. That is a striking figure for an organisation employing only 170 people.

Among the landmarks, the EFSF/ESM have accomplished: the largest order book among sovereign, supranational and agency issuers; the first benchmark-sized deal with a negative yield; and the first ultra-long benchmark-sized deal. In April, the ESM raised €8bn on a deal with an order book of €21.6bn.

But issuing in only euros exposes the ESM to risks. If the euro market ebbs, the ESM would lose its source of funding. While taxpayers back the ESM's credit, it does not use any taxpayer money to disburse assistance loans. All of its money must come from the capital market. As the lender of last resort for euro area sovereigns, the mechanism has no back-up.

The ESM began to address this funding liquidity risk in 2016. Its aim was to spread risk over the two deepest capital markets – dollars and euros. The goal was to launch the first dollar deal in October, around the time of the ESM's fifth anniversary, to diversify the investor base and capture cost efficiencies. It was decided to swap all of the proceeds back into euros, as this is the only currency the ESM uses to disburse loans to countries.

The inaugural dollar deal, on 24 October, attracted 130 investors assembling interest of $7bn, with a significant number of new names. As the ESM had announced that it would not raise the intended volume, it sold no more than $3bn of this five-year bond.

Investor appetite for Europe has surged in 2017. With the US and UK facing political challenges, Europe has emerged as a safe haven. The economy is expanding sturdily, and many non-European investors are interested in increasing their exposure to the region. The ESM is the only blended euro credit available – now also in dollars.

The ESM is borrowing in the two strongest global currencies. More importantly, it has achieved exceptional investor diversification. The euro will remain the ESM's main issuance currency while it continues to develop a strategic presence in the dollar market. The ESM is aiming to build a yield curve with maturities of two, three and five years, and plans to go to market once or twice per year.

Kalin Anev Janse is Secretary General of the European Stability Mechanism. This article represents his personal opinion, and not necessarily that of the ESM or the EFSF.

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