Tuesday, 22 May 2012

Everything you wanted to know (but were afraid to ask)about the EU's probable saviour : EURObonds

'EU leaders will talk about managing a rebellious Greece during Wednesday's EU summit in Brussels, but there is one, even more important issue you should be watching: eurobonds.

Support for anti-bailout parties in Greece has generated market angst, but EU leaders will make few decisions on how to handle the troublesome country until after the results of a new round of parliamentary elections are published on July 17.

Instead, their discussion of eurobonds will be crucial. Support for common euro area bonds has ballooned since they were first proposed as a possible solution to the crisis last year, and they hold the potential to take significant pressure off of troubled EU sovereigns almost immediately.

What are eurobonds and how legitimate of a crisis solution would they be? Click below to read our complete guide.

Eurobonds with "several" guarantees would split the burden between countries.

The least radical approach to common eurobonds would come in the shape of centrally issued bonds with "several" guarantees. This would force each country to repay a certain amount of the debt issued based on the level of its debt burden, but would not force other countries to step to guarantee obligations from other countries in the event that one or more becomes unable to pay.

Because such an approach does not violate a clause in the EU treaties preventing countries from bailing one another out, the issuance of eurobonds with several guarantees would be permitted under the current EU treaties. Then again, the fact that these bonds don't provide for loss-sharing in the event one contributor cannot pay could compromise their credit rating and might not alleviate significant pressure from troubled EU sovereigns.

"Jointly" guaranteed bonds would force European countries to share the burden for debts.

"Joint" guarantees would ensure that investors receive the face value of their bonds, regardless of whether certain members can make good on their promise to pay a percentage of those bonds.

Such pooling of debt might be illegal under the current terms of the EU Treaty, as countries are prohibited from assuming the losses of other countries. Thus, approval of such a program would likely face some political backlash, as Northern Europeans might balk at assuming the debts of their less disciplined Southern neighbors.

On the other hand, jointly guaranteed bonds would go a long way towards stemming the crisis, as it would convince investors that strong economies like Germany and France would step in to prop up their neighbors and keep the eurozone whole.

Prominent plans consider "joint" AND "several" guarantees

Two studies of eurobonds undertaken by the German Council of Economic Experts and the European Commission suggested that a middle solution—eurobonds with joint and several guarantees—might be a practical manner of eurobond issuance.

In each situation, stronger economies would have to pay a higher fee to borrow, while borrowing costs for weaker countries would come under control.

See the rest of the story at Business Insider 


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