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Why EFSF Auction Was So Weak

What if the EFSF had an auction and nobody came?

The EFSF finally got an auction through Monday, but nobody is cheering. To begin with, the initial auction of 5 billion euros that was supposed to happen last week was cancelled. Today's auction of just 3 billion euros clearly indicates lack of demand.

Second, spreads are widening on the bonds. The yield on the 10-year EFSF bond that was floated today (the money will be used for Ireland) was 3.59 percent, considerably higher than even 6 weeks ago. Ten-year German bonds are at 1.8 percent, by comparison.

Poor demand is one factor, but others are pointing to concerns that France may eventually lose its AAA-rating. The EFSF is itself guaranteed by Germany and France (mainly), so if France is downgraded the EFSF could also be downgraded. That would make the cost of bond issuance prohibitive.

But it's already getting prohibitive.

With yields moving up, prices moving down, earlier buyers of these bonds (governments like Japan, for example) cannot be happy. That may be one reason there was such low interest last week from the G20 on expanding the EFSF.

We need a credible plan to ring-fence Italy and Spain. If we get that, markets will move up and stocks will start to trade on fundamentals. Without it, the doomsayers will be right: the ECB will be forced to go all-in when nobody can afford to float debt, or buy it.

Elsewhere, stocks rose midday on a somewhat off-the-cuff remark from ECB member Juergen Stark: "I assume that in 1-2 years at the latest the crisis will be under control, if not overcome. Overcome in the sense that acute political actions are no longer necessary."

Two years? That's how far we've come: that's worth 80 points on the Dow. And Stark is leaving the ECB!

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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