December 5, 2011
EU countries would benefit from joint bond emissions to finance their public debt. Joint bonds would create a huge market comparable to that for US federal debt and enable governments to secure better terms thanks to higher liquidity.
Joint bond emissions will have to be guaranteed by all participating countries. In order to secure low interest rates participants must pursue sound fiscal policies, reducing their deficits to close to zero. Otherwise investors will prefer bonds from individual countries with the best ratings.
Presently, the huge disparities in fiscal and rating standards between euro-zone countries make joint emissions for all euro-zone countries politically impossible, even if they would help peripheral countries to secure lower interest rates.
But the six euro-zone countries enjoying AAA rating and solid fiscal positions might well be capable of pooling their public borrowing. Common bond issues would would be more attractive than separate national bond issues because of the higher liquidity they offer.
Nothing prevents these countries to instruct their debt agencies to define the guarantee rules and the appropriate timing for pooling their issues. They would, in addition, have to agree to respecting very strict rules for fiscal policy and public debt.
In the present market situation these six countries should be able to sell joint 10 year bonds at about two per cent interest, which is better than what each of them might have to pay separately.
As soon as other euro-zone members will meet the very strict rules for fiscal behaviour and obtain AAA credit rating they should join the group of “elite bonds” countries.
Would this not lead to a fracture within the euro-zone and make life for the peripheral countries even more difficult, producing a two-tier euro-zone, one enjoying very low interest, the other finding it difficult to attract investors below seven per cent? And would it not make it even harder for Italy, Spain or Portugal to overcome their structural difficulties and trim their public debt burden to sustainable levels?
These are serious objections.
Complementary measures will therefore be required to prevent widening the rift between them and the core:
- The EFS and the ECB will have to stand ready to prevent an excessive widening of the spread, say beyond 500 points.
- EU structural and agricultural funding, annually more than four billion Euro per country, should be focused on removing structural impediments to growth.
- Finally and crucially important, the core countries should guarantee the solvability of those peripheral countries that engage in effective fiscal reforms.The prospect of widening the zone of “elite bonds” should help calm the markets, even it will be take at least 10-15 years before all euro-zone countries may have sufficient fiscal discipline and trust to join in the pooling of bond emission