Friday, November 25, 2011

The name's Bond....Stability bond....?!

Following the Commission's 'Stability Bonds' proposal on Wednesday (see our previous post here so the title makes more sense) and ahead of an upcoming paper presenting our more in depth examination of the potential for eurobonds, we'd though it would be worth highlighting a few of our concerns on recent eurobonds proposals expressed in our 'No Way Out' paper.

Suffice to say, the options presented by the Commission (option 2 in particular) are very similar to those which we based our assessment on and therefore, we believe, that many of these points ring true for the Commission's plans. See below for our thoughts (with a focus on partial eurobonds):
- The key issue with partial Eurobonds is the implementation. A staggered introduction would have minimal impact in terms of reducing refinancing costs and would offer little help to already insolvent states. There is also yet to be a fully credible plan for how to integrate existing debt markets and debt burdens under this scenario – it is likely they would become incredibly volatile. An outright swap would be impossible to structure with partial Eurobonds, as determining which debt became euro guarantee and which stayed nationally guaranteed would be nearly impossible. This could require a huge debt restructuring, including larger nations, which the eurozone or global economy could not handle.

- In many proposals involving partial Eurobonds, there is an emphasis on making the remaining national debt costly and undesirable, usually in an attempt to maintain fiscal discipline. However, this often goes too far, meaning the higher cost of borrowing for national debt may outweigh the benefits of lower cost Eurobonds. Again given the existing level of debt in the eurozone, many countries would immediately hit the threshold for Eurobond debt, meaning they were still reliant on national debt for financing. Therefore, the new structure would offer little benefit.

- Additionally, given the problems of implementation and remaining national debt, it’s likely that a sizeable eurozone bailout fund would still be required, not least because the eurozone would still lack a credible lender of last resort. Given the joint debt guarantee this fund would also need to include some form of euro-wide deposit insurance and bank guarantee scheme (since states’ fiscal manoeuvrability would now be limited in a crisis). Furthermore, the additional guarantees offered by core countries under partial Eurobonds, could threaten some of their credit ratings, which would undermine the whole framework.

- There are also huge political constraints, even with partial Eurobonds. Any country issuing sizeable guarantees, even under partial Eurobonds, will expect some control over the budgets which they will be backstopping. The divisions already arising in the eurozone over the implementation of bailout conditions show that such an arrangement is extremely difficult to sell to national electorates. Even if Eurobonds were administered and controlled centrally, the EU’s history of politicising supposedly independent institutions suggests this approach may not be successful. Most importantly though, given these concerns, without full democratic backing it is unlikely that any Eurobond proposal could ever be durable or stable over the long run, not to mention desirable.

- Overall, it seems that the only really economically sustainable method for introducing debt mutualisation in the eurozone would be through full Eurobonds. However, as the previous point suggests this would be politically impossible in the near future. Not only would it require a lengthy public debate on the issues, there would a substantial revision of the EU treaties (though it could possibly be achieved through a separate eurozone Treaty) in addition to a series of conditional referenda to ensure widespread democratic backing. Eurozone electorates are still a long way from providing this.


Rollo said...

Stability bond my bottom!The euro nations have run out of money. So they agree to borrow some more. But the some more is not enough. So they agree to use the money they have a greed to borrow will be leveraged to be a guarantee that they will pay back lots more mopney that they will be forced to borrow. Borrowed money as the guarantee that they will pay back the original debt; and the debt borrowed to be the guarantee; and the debt the guarantee is to secure? Stability my bottom: they will be junk before they come to auction.

Philip said...

Well, I think it will only buy time and increase costs. The Euro countries are much too diverse and everybody (at least the economists) knew that and blew the whistle when it was decided to go for it. But, as they were told, politics rules economics and not the other way around. Now they will be reached to wake up slowly that they can't act against the markets - not even the politicians. Therefor the Euro has to go into the dust bin of history and the Euro countries will have to struggle on which a substantial price tag attached to the experience.

Denis Cooper said...

"... a substantial revision of the EU treaties (though it could possibly be achieved through a separate eurozone Treaty)"

How could it possibly be achieved through a separate eurozone treaty, without first amending the EU treaties to grant the eurozone states the legal right to do it?

Without repeating the entire rigmarole, I refer you to my reply to Philip Porter yesterday, here:

which starts:

"Even if Mats Persson has put it forward, the argument that "the UK ... cannot prevent the EMU Member States concluding a totally separate (at least from the legal standpoint) treaty in addition to the main EU treaties" is incorrect in general terms."

My caveat is that the radical EU treaty change ALREADY AGREED by EU leaders on March 25th:

could be construed by the eurozone states as a licence to do much more than conclude their intra-eurozone ESM treaty signed on July 11th:

If that EU treaty change is allowed to come into force then the 17 eurozone states could subsequently argue that the 27 EU member states had thereby agreed to a wide range of eurozone measures "to safeguard the stability of the euro area" and that eurozone bonds were an essential component of an overall "stability mechanism".

Along with a eurozone Tobin tax, and the use of the ECJ to impose fiscal discipline in the eurozone, and a procedure for the orderly bankruptcy of a eurozone state, etc.

It beggars belief that Cameron could have been so reckless as to assent to that dangerous EU treaty change, without insisting on any safeguards to protect the UK's national interests.