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EFSF Considers Euro Warning Clause

A draft prospectus prepared for the latest euro zone bail-out instruments includes explicit warnings to investors that the euro could break apart or even cease to be a “lawful currency” entirely.


The European Financial Stability Facility, which is creating the products to insure bonds of troubled countries against default, is debating whether the “risk factors” should be included in the final version.

In the latest draft of the prospectus, seen by the Financial Times, a summary of the dangers to investors includes: “[R]isks arising from a Reference Sovereign ceasing to use the euro as its lawful currency...or the cessation of the euro as a lawful currency”.

Including such a warning in an official document from the euro zone’s own rescue fund would be a surprising move. European leaders have frequently insisted that a euro break-up is unthinkable, although last month France’s Nicolas Sarkozy and Germany’s Angela Merkel accepted for the first time that Greece might leave.

“If you put something like this in the prospectus, you must consider what possible signal effect it has,” said one European official.

Long lists of risks are standard practice in all prospectuses, with many being little more than legal boilerplate. The EFSF’s draft includes four pages of risk factors, covering everything from tax to payment triggers.

The draft appears to be almost complete, ahead of the expected launch of the instruments in January. But the details of the risks of euro exit remain blank, as the EFSF debates whether to include them. Lawyers are debating the merits of including warnings about the euro in corporate prospectuses, although several London bond lawyers and bankers said they had yet to see them added.

Petrobras, the Brazilian national oil company, appears to have been the first to add a warning. In a US-filed supplement to a prospectus for a 1.85 billion euros bond this month, it warned: “Market perceptions concerning the instability of the euro, the potential reintroduction of individual currencies within the euro zone, or the potential dissolution of the euro entirely, could adversely affect the value of the euro notes.”

The new EFSF products, known as Euro Sovereign Credit-Linked Certificates, are modelled on credit default swaps, a type of derivative used to protect against corporate or sovereign default. European countries hope the financial engineering will allow the EFSF to spread its limited resources more widely.

The certificates will use the standards of private-sector CDS to judge whether default has occurred – a test Greece is trying to sidestep by the use of a “voluntary” restructuring.

The EFSF declined to comment.

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