Eurobonds to secure high rating for Eurozone emergency loans

Euro

Eurozone countries, some facing "junk" debt ratings, are trying to find ways to finance emergency loans. Image from Flickr.

A company set up specifically to guarantee Eurozone emergency loans will ensure that creditors are paid. This “special purpose vehicle” – SPV – will guarantee up to 120 percent of the amount of loans or bonds that will be issued by Eurozone countries. This is an effort to secure an AAA rating for Eurozone debt, which will hopefully make these emergency loans more attractive to investors and help settle skittish investors.

The shape of Eurozone emergency loans

Eurozone emergency loans are the end result of severe debt in some European countries, such as Greece. In order to stabilize the financial future of countries that participate in the Euro currency, countries are creating a special purpose vehicle corporation. The SPV will be known as the European Financial Stability Facility, or EFSF. This company will basically act as a single entity, supported by several different countries, that will have the authority to take on debt.

Emergency loans to be taken on by the EFSF

The EFSF, as a limited liability corporation (LLC), will have the authority to take out or guarantee emergency loans. By selling bonds that the participating countries guarantee, this company will provide emergency loans to those guaranteeing countries. Mildly complicated, but in the end, the company is a go-between in financial markets for these governments. The bonds sold by the EFSF will be called “Eurobonds.”

What the EFSF will look like to investors

The reason many Eurozone countries are teaming up to create the EFSF for their emergency loans is in order to get a better credit rating. With Greece and other Eurozone countries being downgraded, they simply could not attract investors. By creating a larger entity, the countries hope that the general credit rating for the debt issued will rise. If the rating is upgraded, then investors ranging from other countries to mutual funds may be willing to float these needed emergency loans. The countries behind the EFSF will be promising to pay up to 120 percent of the value of these loans – so it should be a relatively stable investment.

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