The only long-term solution for us is closer Eurozone integration

later12

Sand wrote: »

@Later10


That would make sense but it doesnt appear to be what the authors propose. Theyre using the same weighting (based on equity shareholding in the EIB) multiple times:



Now either theyre explaining themselves atrociously, or theyre saying the coupon on the Eurobond issue will be determined by a weighted basket of national government bond yields, and the same weighting will determine the channelling of the proceeds and the liability for servicing the bond.

They may be talking about a pre-determined coupon, but no I think you are reading not reading it correctly in suggesting that they are talking about an ongoing chanelling of the proceeds of debt auctions to all members, regardless of need. In saying the proceeds of the bond issue would be channeled to each government using the same weights, my reading of that would be that they will use the same weights to onlend a capital amount as were used in the determination of the coupon.

As for the pre-determined coupon, I don't think it particularly important. The point in linking to the De Grauwe and Moesen paper is simply to illustrate that a scheme can be established whereby the peripherals cannot simply take Germany for a ride, and whereby Germany can keep its borrowing costs low, relative to other Eurozone members.

Wouldnt it be necessary? Whatever they may have meant when discussing the coupon on the Eurobond, it is derived from the national bond market. Unless were going to lock in rates, national bonds would have to continue to be issued in a large enough scale to provide a useful sample.

One could use any number of methods to establish the initial fee. Credit ratings for example, using an internal CRA.

And governments, especially those who feel they can meet their debt at a lower rate than is offered by the maths of the Eurobond will always have the incentive to test the water to see what they can really issue debt at.

If the EIB were working correctly, and provided that the weightings are correct, and provided the debentures were guaranteed by a 'joint & several' agreement, and considering the increased liquidity enjoyed by these Eurobonds, then it is pretty inconceivable that the likes a core power like France or Benelux should be able to auction its debt independently at a lower coupon value.

But then doesnt that (paying through the nose for debt) just repackage our current problem (inability to raise funds as a national sovereign) in new clothes?

Not if in the initial stages the EIB bonds worked in the form of Brady bonds for outstanding peripheral debt.

If Eurobonds existed, it would be far easier for the likes of Ireland and Portugal to engage in a threat of a hard restructuring of their historic external debts. Current holders of Irish debt could, and I would suggest would, then engage in a process whereby they could swap their Irish sovereign indentures for EIB bonds - just like as happened with Brady bonds in Latin America. This would amount to a write down of the principal on the Irish debt.

We'll be locked into a straightjacket where our borrowing will be dictated by the needs of the larger economies

Fantastic, if that were the case (which I'm not convinced about). Our borrowing will actually be restricted by cost, should a marginal rate of borrowing apply to the upper tranche - however, a restriction of Irish sovereign borrowings is something to appeal for, in my opinion.

Sand

@Later10

They may be talking about a pre-determined coupon, but no I think you are reading not reading it correctly..

To save going round in circles we'll have to agree to disagree on that point.

The point in linking to the De Grauwe and Moesen paper is simply to illustrate that a scheme can be established whereby the peripherals cannot simply take Germany for a ride, and whereby Germany can keep its borrowing costs low, relative to other Eurozone members.

But the problem is, Germany has to be taken for a ride for there to be much point in issuing Eurobonds. The periphery requires a bailout to avoid default. A pseudo "bailout" has already been tried, and failed. To maintain a Euro without sovereign default requires a transfer union where the core will buy up and write off peripheral debt - thats just a cold harsh political reality. If Germany isnt willing to engage in a transfer union (and every indication so far is that it is not - and indeed cannot, due to its constitutional laws against taking on the debt of another country) then by a process of elimination we are left with a default.

The authors work here is "interesting" but a Eurobond that is designed to assure Germany that it wont be taken for a ride will be far more dangerous than it will be useful.

One could use any number of methods to establish the initial fee. Credit ratings for example, using an internal CRA.

If the EIB borrows money to lend stupidly (i.e. ignoring politically inconvenient market signals/credit ratings) then its own ability to raise funds at reasonable rates will be endangered. An internal CRA wouldnt be considered anymore reliable than a political mouthpiece - especially being founded precisely because the politicians didnt like the answers they are getting currently and want an agency that will give them answers they do like.

If the EIB were working correctly, and provided that the weightings are correct, and provided the debentures were guaranteed by a 'joint & several' agreement, and considering the increased liquidity enjoyed by these Eurobonds, then it is pretty inconceivable that the likes a core power like France or Benelux should be able to auction its debt independently at a lower coupon value.

Well - theres a lot of ifs there, and national sovereign debt of Germany will always be considered less risky than the debt of a supranational agency.

Under sufficient strain, a supranational agency might be torn apart by political and economic pressures. Germany on the other hand is unlikely to vanish from the map. Germany will also be able to act much more decisively to protect its own particular creditors and to make its own fiscal decisions. On the other hand the EIB is going to be a supranational organisation and a major crippling hinderance to the Euro response over the past three years has been a decision making process incorporating 17 countries, plus interested bystanders.

Not if in the initial stages the EIB bonds worked in the form of Brady bonds for outstanding peripheral debt.

There doesnt appear to be any indication that Germany is ready for anything of the sort - the authors themselves admit its a political reality and its underlying their quest to create a eurobond without purpose.

If Eurobonds existed, it would be far easier for the likes of Ireland and Portugal to engage in a threat of a hard restructuring of their historic external debts. Current holders of Irish debt could, and I would suggest would, then engage in a process whereby they could swap their Irish sovereign indentures for EIB bonds - just like as happened with Brady bonds in Latin America. This would amount to a write down of the principal on the Irish debt.

Current holders of Irish debt could, and I would suggest would, then engage in a process whereby they could swap their Irish sovereign indentures for EIB bonds - just like as happened with Brady bonds in Latin America. This would amount to a write down of the principal on the Irish debt.

How could it when the authors have gone to such extents to ensure Ireland will pay its fair share, based of its (awful) sovereign debt rates, so as to ensure Germany is not taken for a ride? What would essentially happen is we would be swapping Irish sovereign debt issued at low rates we enjoyed in 2001-2008 for Eurobonds where wed be paying interest rates calculated of our current horrific market rates. This might be a fantastic deal for anyone who issued debt to Ireland at low rates, as theyd be able to trade up to a much higher interest rate than they initially bargained for but it wouldnt reduce Irelands debt burden - if anything it would increase it.

Lets not forget that Brady bonds came into existence to deal with the fallout of a spate of Latin American defaults that had already occured. The timing is important, because youre arguing that Ireland, Greece, Portugal, Spain, Italy, Belguim can realistically threaten to default to bounce creditors into an agreement to take on debt which will be backed by either the peripheral countries threatening to default, or their fellow euro zone members who will be approving their threats to default. This wasnt the case with the USA: It wasnt threatening to default, and it wasnt supporting others threats to default.

If the main selling point of the Eurobonds is going to be thats it backed by the Eurozone governments that will never ever default or allow a default - whatever about the reckless periphery - then threatening to default as leverage is going to undermine that selling point.

Not that I disagree with taking a hard line in negotiations - dropping our pants and bending over the table hasnt really worked - but it would be insanely dangerous to presume it would be costless or a win-win.

Fantastic, if that were the case (which I'm not convinced about). Our borrowing will actually be restricted by cost, should a marginal rate of borrowing apply to the upper tranche - however, a restriction of Irish sovereign borrowings is something to appeal for, in my opinion.

Our borrowing is actually restricted by a cost already - its called the interest rate. But it hasnt stopped this drama from happening.

This is the core mistake, warmed up and repeated from the Euro project. Put in harsh conditions, straightjacket decision making and presume it will bring the feckless periphery to heel, forcing them to act like good Germans.

Hasnt worked for the Euro, no reason to assume it will work for the Eurobonds.

later12

Sand wrote: »

But the problem is, Germany has to be taken for a ride for there to be much point in issuing Eurobonds. The periphery requires further bailout to avoid default.

The periphery does indeed require further bailout to avoid any form of default. But Eurobonds make a partial default more palatable - attractive even - since were official Eurobonds to be established, some of the most serious consequences of defaulting on debt by a sovereign can be toned down, since that sovereign is no longer intending to return to market - a bit like Ecuador a few years back.

Further bailouts, under a Eurobond scheme, would be a perplexingly unnecessary process. We already know that the EU Commission and the political leadership of the zone seem to understand the need to restructure peripheral debt, and as we see in the media today, this opinion seems to be seeping into the ECB. Eurobonds offer an attractive way of doing this, whilst keeping European debt volumes in check, and whilst ensuring credit access by crisis hit member states.

If the EIB borrows money to lend stupidly (i.e. ignoring politically inconvenient market signals/credit ratings) then its own ability to raise funds at reasonable rates will be endangered.

Not at all. Not under a process where the lower debt tranche for all individual Eurozone members is guaranteed jointly and severally by each member. It would resemble the EFSF - the EFSF, arguably, lends stupidly, and ignores credit ratings, and does the opposite of that which the market does, and not only is it a form of Eurobond, an EFSF bond is probably the most attractive sovereign product on the global market from the point of view of income and safety.

Why would one buy German bunds when one can have the same risk of a German bund, but at a higher coupon?

An internal CRA wouldnt be considered anymore reliable than a political mouthpiece

But the internal CRA would not be for the benfit of the buyers of European debt, it would only be for the benefit of the EIB in apportioning a fee in onlending its debt.

Possibly, the EIB could use external CRAs, like I said there are many options in determining a fee, this would hardly be a major difficulty to overcome.

Well - theres a lot of ifs there, and national sovereign debt of Germany will always be considered less risky than the debt of a supranational agency.

But this EIB debt - specifically that lower tranche - would be guaranteed by Germany under the terms of the agreement. The fact that the lower debt tranche also happens to be guaranteed by the other 16 members does not make it any more risky.

There doesnt appear to be any indication that Germany is ready for anything of the sort - the authors themselves admit its a political reality and its underlying their quest to create a eurobond without purpose.

Nobody here can say what is or is not going through the minds of political leaders, all any of us can debate is what is or is not a good idea in principle, and why it ought, or ought not, to be taken seriously. I don't know if Eurobonds are as yet something that the Germans are seriously considering, the German finance minister seemed open to the idea during the Spring, but I don't see the point in reading tea-leaves on that issue.

The Eurobond proposal - as proposed by many different institutes, politicians and economists - is a prospect that many people quite rightly think ought to be pursued. It has some strong precursors, and some strong economics and financial arguments in its favour. Whether or not it will be taken up now or later is impossible to say.

What would essentially happen is we would be swapping Irish sovereign debt issued at low rates we enjoyed in 2001-2008 for Eurobonds where wed be paying interest rates calculated of our current horrific market rates.

No, the argument is for the fee to be charged to a country to be weighted by some measuremnet, such as a credit rating or an observed yield - not for it to be the equivalent of an observed yield. Also, under most proposals that I have seen, there would be two tranches of debt for each state, an upper and a lower tranche, each with two different methods of calculating the cost of borrowing.

Lets not forget that Brady bonds came into existence to deal with the fallout of a spate of Latin American defaults that had already occured. The timing is important, because youre arguing that Ireland, Greece, Portugal, Spain, Italy, Belguim can realistically threaten to default to bounce creditors into an agreement to take on debt which will be backed by either the peripheral countries threatening to default, or their fellow euro zone members who will be approving their threats to default. This wasnt the case with the USA: It wasnt threatening to default, and it wasnt supporting others threats to default.

I don't think it matters, actually. I don't see any logical reason as to why the timing should matter - in reality any form of default will have to be in co-operation with Europe, be that pre or post Eurbond issues.

It would be helpful, during the establishment of Eurobonds, for the peripheral governments to strike an agreement with Europe on restructuring peripheral debts, upon which CRA downgrades would not matter a damn because the sovereigns in question would literally be riding away from the capital markets for good. The 'joint & several' backing of the EIB would make any downgrade of the EIB simply incredible, not to mention the inherent attractiveness of such an institution as the herald of the Euro as a world reserve currency.

Our borrowing is actually restricted by a cost already - its called the interest rate. But it hasnt stopped this drama from happening.

No. Surely the point is that when the borrowing was executed, there was little to no cost restriction; the convergence of borrowing costs in Europe over the past 15 years was disastrous. Eurobonds, should they be managed correctly by the EIB, would help to keep debt levels under control throughout the Eurozone. We would not simply have to hope blindly for investor/market efficiency and watchful CRAs.