Ahead of Eurogroup meeting on Thursday 9 July, Spain has circulated to the other Member States a note proposing the creation of a financial mechanism – a ‘European Sovereign Facility’ (ESF) – pooling Member States’ public debt issuance. Thanks to this mechanism, the European Union, through the volume and liquidity of the securities issued, would be in a position to establish itself as a sovereign debt issuer enjoying global safe asset status.
“Spain proposes to partly centralise sovereign issuances as a way to address the scale constraint. Such approach would remain fully compatible with the need to ensure sound public finances, as the issue would be addressed at an aggregate level, without the creation of new debt”, the Spanish authorities state in their note, a copy of which Agence Europe has obtained.
On a voluntary basis, a minimum number of Member States – Spain suggests at least the five main public debt issuers in the euro area – would entrust part of their debt issuance to the European Commission. The EU institution would borrow the equivalent amount in European bonds on the markets, which it would redistribute to the participating countries in the form of loans.
Spain calculates that, through this mechanism, the EU could issue €850 billion of debt each year. Within five years, it would reach the minimum issuance threshold of around €5,000 billion in securities, which some economists consider necessary for an issuer’s debt to enjoy safe asset status.
When the ESF reaches cruising speed, Spain believes that the countries participating in the public debt issuance aggregation mechanism would finance themselves at a cost close to that currently borne by Germany. Expected saving: €25 billion per year. Member States – Ireland, Luxembourg, and the Netherlands – whose financing costs are already lower than Germany’s would be entitled to a compensation mechanism.
The bonds issued under the mechanism would benefit from a double guarantee: the loan granted to the participating Member State and the EU budget. “The latter is essential to ensure full fungibility with existing EU bonds and should be included as part of the own-resources ceiling” of the post-2027 EU budget, according to Spain.
And, in the event of a default by a participating country, losses borne by the EU budget would be recovered from the European funds allocated to that Member State. “Only if these were not sufficient, would other participating States cover losses, shielding non-participants and holding a claim on the defaulting Member State”, the Spanish authorities specify.
In order to convince reluctant countries, Spain highlights the fact that its proposal is based solely on efficiency gains resulting from the reorganisation of national public debt issuance, “the overall volume of (the remaining) public debt unchanged”. Strong safeguards would address moral hazard and adverse selection, the country adds, inasmuch as participation in the mechanism would be strictly conditional on compliance with European fiscal framework and on a credible, financially sustainable debt trajectory. (Original version in French by Mathieu Bion)