EU Sovereign Bond - inevitable and necessary?

later12

One aspect of the current crisis which has continued to baffle me also happens to be the most startlingly obvious path to economic recovery for the entire Eurozone, and that is the establishment of a single European sovereign bond in line with our already well established single currency.

The establishment of these bonds, which would replace current individual member states' bonds, would rally investor confidence around the Euro and bring to an end, for once and for all, the burning question of individual sovereign debt default that is currently troubling the peripheral economies and likely to spread to Spain and Italy.

It is quite clear the the core of Europe, particularly France and Germany which are the current drivers of the recovery, remain strong. By pooling our bonds altogether into a common European bond, surely we would be spreading the success of individual states as well as sharing the losses. We are already doing this through the establishment of the EFSF and the European Financial Stablity Mechanism, except that the proposed mechanism would be far simpler and more likely to inspire confidence in bond investors since it is an "all or nothing" approach that would copperfasten the core strength of the Eurozone economy and establish the European model's confidence in its own potential success.

Why on Earth the individual members of a single monetary union continue to issue independent bonds, or have done so, is quite intriguing. I do realise, by the way, that this mechanism for turning around the fortunes of the SEC would necessarily lead to greater European integration and the establishement of a more centralised European fiscal policy commission in the Union.

Anyone agree that this is, now, both necessary and inevitable, or perhaps have any ideas on how better to ameliorate or improve such a common bond scheme?

Victor

I think the states paying at the lower end of the scale might be hesitant.

It would also put EU / ECB control on the borrowings of individual state and other authorities (not all public bonds are issued by states, some are issued by local and regional authorities).

It would be useful to increase EU oversight of banking.

ei.sdraob

bonds have to be repaid

a eu wide bond would have to be paid for "somehow"

i dont think an eu wide tax would be popular in any of the states..

View

An EU bond is probably a real possibility if the crisis continues.

That said, should it involve rolling up some or most of the bad debt of the member states who can't manage their budgets, it is likely to be really controversial in those member states that can manage their budgets.

As such, it'll probably be the last thing the member states want to do.

later12

Victor wrote: »

I think the states paying at the lower end of the scale might be hesitant.

View wrote:

it is likely to be really controversial in those member states that can manage their budgets... As such, it'll probably be the last thing the member states want to do.

These are valid points in themselves, however with the contagion spreading to Spain and even to Italy, whose banking industry and private sector debt are so healthy, the question of the survival of the Eurozone is now more relevant than ever.

The resolution of this issue necessitates a drastic display of true commitment to the European currency model - that doesn't just mean donating to the EFSF and the EFSM but an 'all in' approach which, in my opinion, should have been the model from the very outset. If constituent members are in this for the long run then they must be prepared to be in entirely, and not enjoying individual success on their side, while the peripherals suffer loss on the other side.

later12

ei.sdraob wrote: »

a eu wide bond would have to be paid for "somehow"

Forgot to post this. Taking into account the low yields subjected to the likes of France and Germany, and particularly the core strength of these economies, the EU wide sovereign bond would in theory have much lower yields than current Irish, Greek, Spanish and Portuguese yields.

Anonymous1987

The European Financial Stability Fund bond issue next month will effectively be an EU bond. Of course the bond may run the risk of crowding out national sovereign bonds, it does seem like a step towards a closer fiscal integration.

later12

Anonymous1987 wrote: »

The European Financial Stability Fund bond issue next month will effectively be an EU bond.

You are quite correct to say that it is effectively an EU bond however the fact is that all of these funds would be much better constituted into an actual, simple bond format. This would have the dual role of being a far simpler and more efficient way of doing business as well as showing the market that we are all in this together

skyhighflyer

Well the common currency worked out great, so why not a common bond too?*

*bonus points for anyone who spots the problem in this sentence

skyhighflyer

later10 wrote: »

You are quite correct to say that it is effectively an EU bond however the fact is that all of these funds would be much better constituted into an actual, simple bond format. This would have the dual role of being a far simpler and more efficient way of doing business as well as showing the market that we are all in this together

The point of the EFSF was to give out that signal and it hasn't worked. If the eurozone has shown us one thing it's that 'one size fits all' economic policy doesn't work. A common bond would just end up being a crutch for nations with weak economies by allowing tham to borrow at a lower rate than their creditworthiness justifies. Look what that did to Ireland. We really don't want a repeat of that again.

Permabear

This post has been deleted.

Scofflaw

Anonymous1987 wrote: »

The European Financial Stability Fund bond issue next month will effectively be an EU bond. Of course the bond may run the risk of crowding out national sovereign bonds, it does seem like a step towards a closer fiscal integration.

On the other hand, it's an emergency mechanism rather than a standard mechanism - and, indeed, it's an emergency and temporary arrangement. It will be interesting to see what shape the post-2013 equivalent takes.

In theory the fund could be used as it's being used in our case, to cap the exposure of individual Member States to rises in the market rates, but at far lower levels - however, that seems unlikely, given that the bond market rates are supposed to help by encouraging fiscal discipline on the Member States.

cordially,
Scofflaw

View

skyhighflyer wrote: »

The point of the EFSF was to give out that signal and it hasn't worked. If the eurozone has shown us one thing it's that 'one size fits all' economic policy doesn't work.

Actually, it has shown us that states that follow stupid economic policies, such as the pro-cyclical ones we had, end up in serious trouble.

Anonymous1987

View wrote: »

Actually, it has shown us that states that follow stupid economic policies, such as the pro-cyclical ones we had, end up in serious trouble.

I'm not so sure our policies were that pro-cyclical we managed to pay down government debt pretty well over the years. It just seems that our expenditure and tax became structured on never ending high rates of growth, we might have managed the budget deficit by now were it not for capitalisation of the banks.

Anonymous1987

skyhighflyer wrote: »

Well the common currency worked out great, so why not a common bond too?*

*bonus points for anyone who spots the problem in this sentence

One could argue that the current crisis is the result of a common currency lacking a common debt instrument. In this case a common bond would seem like the next step, then we are left with the question is a common bond or debt instrument sufficient without a common fiscal policy?

View

Anonymous1987 wrote: »

I'm not so sure our policies were that pro-cyclical we managed to pay down government debt pretty well over the years. It just seems that our expenditure and tax became structured on never ending high rates of growth, we might have managed the budget deficit by now were it not for capitalisation of the banks.

I am open to correction on this but I believe the nice reduction that can be seen in the graph is a reflection of the growth of GDP rather than of a pay-down of our debt.

From memory, I believe that the state only reduced the absolute amount of debt for one year when Ruairi Quinn was Minister of Finance. I believe the state actually increased the absolute amount of our borrowings right through the "celtic tiger" years (i.e. we continued to borrow).

The pro-cyclical reference was to policies such as lots of property based tax-breaks during a time of high property price growth (i.e. the policies artifically boosted demand for property at a time when there was already high property price growth). I remember one Government Minister justifying these tax-breaks on the grounds that the government couldn't interfere in the free market - he totally missed that such tax-breaks were massive interference in it.

Anonymous1987

View wrote: »

I am open to correction on this but I believe the nice reduction that can be seen in the graph is a reflection of the growth of GDP rather than of a pay-down of our debt.

Actually you are right, I had a look at the nominal debt levels below and an entirely different picture emerges:



On the other hand it could be said that the level of debt is not as important as the cost of servicing that debt, see the interest costs and the percentage of interest to tax revenue below, so by keeping the debt level roughly constant while the economy and tax revenues grew the government was managing the debt well while not actually paying it off.

Anonymous1987

View wrote: »

The pro-cyclical reference was to policies such as lots of property based tax-breaks during a time of high property price growth (i.e. the policies artifically boosted demand for property at a time when there was already high property price growth). I remember one Government Minister justifying these tax-breaks on the grounds that the government couldn't interfere in the free market - he totally missed that such tax-breaks were massive interference in it.

I agree that was a terrible policy and set us up for today's events, rather than attempt to burst the bubble or leave it to sort itself out they inflated it further.

later12

skyhighflyer wrote: »

The point of the EFSF was to give out that signal and it hasn't worked.

The EFSF was supposed to be too big to ever require drawdown - and that failed. Investors clearly didn't see it as an adeqaute expression of confidence of the Eurozone in its own self.

So yes, the EFSF was to give that signal, but it wasn't adequate - so perhaps that is why the next step must be taken to provide a single european bond.

If the eurozone has shown us one thing it's that 'one size fits all' economic policy doesn't work. A common bond would just end up being a crutch for nations with weak economies by allowing tham to borrow at a lower rate than their creditworthiness justifies. Look what that did to Ireland. We really don't want a repeat of that again.

While I do think you have a point on interest rates, that is always going to be the case with Ireland anyway, and the bond question is actually quite different to the question of private or corporate debt management.

Victor

Anonymous1987 wrote: »

Those figures are somewhat manipulable. They may be a bit* fuzzy because of the Pension Reserve Fund / future pension liabilities, "current" account liabilities, e.g. future fees payable to PPP operators and other off balance sheet items.

General Government Debt may be a more accurate measure.


* A huge bit.

skyhighflyer

Jean-Claude Juncker must have seen this thread

http://www.irishtimes.com/newspaper/breaking/2010/1206/breaking25.html

ei.sdraob

skyhighflyer wrote: »

Jean-Claude Juncker must have seen this thread

http://www.irishtimes.com/newspaper/breaking/2010/1206/breaking25.html

yep as per my theory earlier

However, the plan could meet resistance from countries such as Germany, who want to ensure governments are kept under pressure from bond markets, to avoid a repeat of the years of easy borrowing that led to Europe's debt crisis.

Anonymous1987

Looks like make or break for Europe, move closer together or further away. Interesting times.

EDIT: Those Fookers at the Sunday Business Post stole my catchline :mad: I demand royalties! :pac:

later12

ei.sdraob wrote: »

yep as per my theory earlier

Hmm. Don't get too attached to your theory, Wolfgang Schauble has an article in today's FT where although he says it is not about to happen, he says it may be a coming development in a matter of months.

Jean claude Juncker and Giulio Tremonti, in their article a few pages later, are actively encouraging it.

Personally i believe as per my original post that this is both necessary and just a matter of time.

xavidub

Eurobonds would just postpone the inevitable collapse of the single currency down the road. The economies of the Eurozone are too divergent to enable this project to work.

Anonymous1987

The latest is that Merkel will face pressure from the opposition Social Democratic party in the Bundestag on the introduction of a Eurobond as well haircuts for bondholders. The case is being made in tomorrows FT:

The required solution is a combination of a haircut for debt holders, debt guarantees for stable countries and the limited introduction of European-wide bonds in the medium term, accompanied by more aligned fiscal policies. These measures would only work together; none alone would restore stability

http://www.ft.com/cms/s/0/effa001c-07ba-11e0-a568-00144feabdc0.html#ixzz18816sF93

They suggest haircuts for Irish, Greek and Portuguese national debt.

In addition specific attention is given to Ireland with the focus is on removing the bank guarantees and burden sharing with private investors.

In a separate paragraph they write of putting an "end to beggar-thy-neighbour policies and harmful tax competition within the eurozone too". No doubt with Ireland in mind.

later12

I just want to revive this thread a little bit in light of the anticipated EFSF bond sale anytime from the first day of operations in 2011. Presumably the EFSF are going to try and quick-sell bonds before other EU countries try to raise funding in the new year, the new year traditionally being the time of year for such auctions.

Anyway, in my personal opinion the best thing that could happen here is for a hugely successful EFSF bond auction and a not-so-keen take up of French, German and other core union paper in light of depressed trading volumes, thereby resulting in higher yields and a narrowing of Eurozone spreads.

That might shift the Germans in particular to come around to the idea of Eurobonds for once and for all and to realise that in order to continue along this road of European integration, some serious demonstration of solidarity is required for once and for all.

later12

Interesting articles in today's Financial Times relating to Eurobonds, particularly for those who suggest that there would be too much German opposition to their creation.

The article is based on comments by Frank-Walter Steinmeier, leader of the German opposition SPD party

http://www.ft.com/cms/s/0/a1829924-44e3-11e0-a8c6-00144feab49a.html?ftcamp=rss#axzz1FZOKxlW5

The EU should also concentrate on relieving the European Central Bank of tasks that are essentially fiscal rather than monetary policy measures such as bond-buying in secondary markets, and consider “cautious steps” towards launching European sovereign bonds, Mr Steinmeier, the former German vice-chancellor and foreign minister, said.

In an interview with the FT, he insisted that his party would back a “courageous” pan-European solution to the crisis in the German Bundestag. Angela Merkel, German chancellor, could rely on a majority in the parliament, he said.

The agenda should also include the role of the ECB in the crisis, and whether steps should be taken towards launching European bonds, “whether they are called euro-bonds, or something else”.