Eurobonds: why and how?

A tool for debt reduction, not for debt creation

In the géneral sense, eurobonds are bonds in euros issued by entities
outside the Eurozone

In a more specific meaning, Eurobonds would be debt securities
issued by the Eurozone.

The main use would be to replace a portion of the national debts of
member states while improving the safety and reducing the cost of
those debts.
This would be to contribute to reduce the liabilities of those states
via the amortization of those securities.

Their issuance should fulfill very strict conditions as a counterpart.

A more complete version is available in French

What would it be? For what needs?

Definitions

A bond is a long term debt security that is issued to the public (or only
to financial institutions),
usually tradable on a financial market (see
financial assets and markets).
In its general sense a eurobond is a bond that is issued in euro euros
by entities located outside the Eurozone.


More specifically, joint eurobonds are proposed now (*)(**)
by some economists, institutions and
officials.
They would be issued, within strict limits, in euros by a
sovereign
Eurozone's financial institution (by setting
up  an adequate one or converting an existing one), why not
a European Treasury managing a common European budget
that would contribute to amortize those bonds.

The main objective would be to take over a portion of the debt of the
17 states
that are members of the Eurozone (itself coordinated
by the
Eurogroup).

Another possibility would be for the borrowing countries to issue
directly those bonds, here also under strict limits and controls, with
the full or partial guarantee of the whole zone.
(*) the original idea, years ago, was to create them as a tool to
      finance common economic actions of the whole European
       union through "projects bonds". The "Juncker plan"
      of 300 billion European
investment launched in
      2015 could revive indirectly the idea.


(**) Even before, about as soon as the Euro was launched,
        "Eurobond" was a generic term for any bond denominated
         in Euros issued by parties within or outside the Eurozone.

What expected advantages?

This talked-about possibility, still not an official project, is related to
the sovereign debt crisis.

Issuing Eurobonds could be decided quickly. The situation requires it.

This financial instrument would at the same time:
  • Bring more confidence via monetary and financial stability
in Europe and in the world. Of course other global monetary
decisions are needed to reach a full world monetary and
financial sentiment of trust.
  • Lower the cost of the debts
because of the size and liquidity of the market created.
It could become for example a choice investment tool for the
central bank reserves of emerging countries.
Of course this would only apply to bonds with a joint liability of
all Eurozone countries.


This would be actually the least expensive and safest
solution to definitively tackle the crisis.

Reluctance: 
debt creation or debt reduction?

The reluctance

No federal solution, no eurobonds

At the moment the idea is far from "ripe".
In the present state of things, as the conditions (see the related section)
are far from being met, several arguments are put forward against this
idea:
  • Some countries (Germany...) are reluctant to be guarantors
of debts they did not originated
They fear that other - fiscally lax - countries could see them
(
moral hazard) as a new pool of money they could draw upon
with delight.

They also (logically) consider that those securities can be issued
only if the debtor has its own resources to refund them.

This would entail to install beforehand a dose of European
financial federalism
(highly needed by the way, for other
purposes also). With

* a
sizable European budget,
* and some transfer of sovereignty to a
European entity
   having authority on the States budget balance
.

But here the German government tends to think, but that might
go too far, that every European country reaches and maintains
zero deficit before the European union start to spend money for
common purposes and to manage a common European finance,
with common taxes as well as borrowing capabilities.

  • Potential bond subscribers / buyers could share same suspicions.
  • There is a paradox between a generally proposed "golden rule" (*)
and establishing a new Eurobonds debt.
(*) i.e. the necessary termination of policies of public deficits and
     
indebtedness by each State,

Those oppositions might recede if strict issuance and management
conditions
would avoid such biases.


A Europe that favors growth, OK
vith financial sharing, OK
but via a strict respect by every member
of its financial responsibilities


This is what we detail now.

The conditions

Eurobonds should be used only as an instrument to reduce debt
through amortization rather than creating new debts


This supposes
  • A European redemption fund
that would take over a part of the national debts and issue its
own bonds with their own amortization plan

  • A European (or Eurozone) tax resource
(a portion of VAT for example) directly allocated to servicing
and refunding those bonds at all maturities.
This is because crossed-guarantees by all European states,
however
needed, do not seem enough to bring real trust as
well for lenders as for some of those States granting such
collaterals.
The indebted States should also pay a specific contribution to
the fund, in proportion of their debt.
  • A Greater scrutiny and intervention power of the EU (or Eurozone)
on the budgets of individual States to make common rules
and pledges (confirmed by the European parliament or an
Eurozone parliament to ensure their democratic legitimacy)
respected.
  • Generally a more federal, 
thus a less inter-governmental, European governance, not
depending on the whims of one or a few
countries that would
menace to veto any move if they don't obtain a special gift in
exchange.

A democratic one, with the preeminence of the European
Parliament (or an Eurozone Parliament)
already mentioned,
representing the European citizens, as the main stakeholders
in those matters

  • Those Eurozone backed securities replace only
a portion of national debts (a limited percentage of the
GDP of every country involved).
The remaining non-pooled debt would continue to be the
responsibility of the original issuing states.

A debate would be needed to define
* the percentage that can be reached (maybe 50 or 60 %
    of
the GDP of the refinanced countries),
* how to
organize the conversion and under what terms
    (implying a haircut on voluntary
conversions by bearers
    of some state debts?)
.

And in the future?

One may ask about the possibility of other eurobond issuance in the future.
Something clear is that they should not become a tool to cover annual
deficits, as those should not
take place, except in case of unpredictable
shock.

Thus, other issuance programs should be exceptional
and
address "Project bonds" used for highly strategic
common
investment purposes, and which idea might have
been revived by the Juncker investment plan mentioned above

Such securities should be
 
* launched under specific decisions of the European Parliament (or an
   Eurozone section of that Parliament)
 
* limited to very clear common innovation-oriented projects or
   programs
, with a crucial and compelling interest for the Union.

Their management could be made by the EIB / European Investment
Bank, which has a long experience in the related financing areas

What about a practical test?

Nothing forbids several European countries to launch a consortium bond
issue to fund a specific common project, with cross-guarantees.
It would be interesting to see how savers  (if issued to individuals in the
zone) or markets (if auctioned to major international investors) would
welcome them.

Another thing could be to test first the issuance of eurobills (borrowing
certificates with a one year duration)

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M.a.j. / updated
: 31July 2015

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