Brussels, 10/01/2012 (Agence Europe) - Speaking on Tuesday 10 January at a seminar on eurobonds, the president of the Liberal Group at the European Parliament, Guy Verhofstadt, took the view that support for these innovative financial instruments is gaining ground among the main European political forces. He restated the Liberals' conviction that well-thought-out pooling of part of the public debt in eurozone countries would provide part of the answer to the sovereign debt crisis. The creation of eurobonds would send a “powerful signal” to investors by putting an end to the situation where 17 member states share the same currency but continue to have 17 different economic policies. It would also allow the creation of a debt market that would rival that of the United States.
Olli Rehn, the commissioner responsible for eurozone policy, presented the Commission's Green Paper which puts three options to public consultation. These differ according to the proportion of debt stock pooled and the nature of guarantees - joint and/or severally - provided as national guarantees (see EUROPE 10501). Whatever the kind of bond issued, this approach will have to be accompanied by greater fiscal consolidation, he said, referring to the texts tabled aimed at completing the revised Stability and Growth Pact, and the work on the budgetary pact. The commissioner announced decisions would be taken on Wednesday on the five countries that had pledged to return, during 2012, to under 3% deficit in relation to GDP. Other decisions will be announced in two weeks' time on correcting macro-economic imbalance.
Redemption fund. Christoph Schmidt presented a plan drawn up by an independent group of German economists to set up a redemption fund for financing the excess debt (above 60% of GDP) of struggling governments across the eurozone. The proposal seeks to reach agreement between those who above all recommend long-term stability in public finance and those who call for greater solidarity between countries in order to face the crisis. The fund would buy up the excess part of the debt of the countries concerned. Given its size, it would be able to refinance at a cost below that of the countries taken individually. Member states would be under an obligation to consolidate their public finances and would have to comply with a structural reform agenda. This mechanism differs from the eurobonds as it is limited in time, given that the fund dissolves after 20 to 25 years.
Blue/red bonds version 2.0. Jacques Delpla, from the French Conseil d'Analyse Economique, presented the updated proposal on blue/red bonds from the Bruegel think tank which would, he states, mean US dominance on the public debt market could be challenged. “There are sticks and there are carrots”, he pointed out. The issue of blue bonds would target the part of national debt that is below 60% of GDP. Those bonds would be safe and benefit from a lower rate of interest than those for Germany. Even Greece would be able to benefit from them. The annual reallocation of the blue debt would also allow a number of countries to step up pressure for greater budgetary austerity. The red bonds, on the other hand, would concern the excess part of public debt. Remaining the responsibility of issuer member states alone, bond holders would be subject to all possible haircuts. Delpla sounded a note of warning saying: “Our proposal is purely intergovernmental”.
Investors are not convinced by the European Financial Stability Facility (EFSF), as they see it as a mechanism for increasing debt when they require a sound debt issuer, warned Jean-François Robin of the bank Natixis, who suggested the creation of eurobonds with a zero-sum bonus/malus mechanism. The eurozone countries would see the cost of refinancing their debt increase or fall on the basis of macro-economic criteria to be defined. (MB/transl.jl)