It is becoming “increasingly likely” that a European government will need to tap the rescue fund established to aid nations facing sovereign debt crises, according to Morgan Stanley.
Four months after European Union policymakers created the €440 billion ($560 billion) European Financial Stability Facility, yields on 10-year Irish and Portuguese debt rose to records this week vs. German bunds amid renewed investor concern over the finances of debt-strapped governments.
“With government bond yield spreads for some peripheral countries like Ireland or Portugal continuing to widen, it becomes increasingly likely that euro-area governments’ hopes that the mere existence of the EFSF will calm markets and ensure that it will never be used could be disappointed,” Joachim Fels, Morgan Stanley’s co-chief global economist, wrote in a report released Thursday.
The fund was established in May as the Greek debt crisis threatened to spill over to other euro states. That crisis is not over, and “autumn looks set to bring new challenges to Europe,” Mr. Fels said.
A request for help from the fund could speed the end of the continent’s turmoil by proving the terms of the aid are credible and by directing funds to banks in order to plug holes in their balance sheets, Mr. Fels said. By contrast, it could risk exacerbating the crisis if the fund failed to demand tough enough policy changes or if the bond sales by the fund lured investors away from buying the debt of countries such as France or Germany, he said.
There is also a “significant risk” that the debt crisis could migrate to core European economies such as France and Germany, Mr. Fels said. The European Central Bank may then be forced to widen its purchases of government debt, he said.