Agnés Le Thiec from CFA Institute asks: Can Eurobonds help to alleviate the eurozone sovereign debt crisis?
The European Commission has been grappling to find an answer and recently launched a public consultation investigating the relevance and potential benefits of so-called stability bonds.
While much of the focus has been around the mechanics of the process, the attitude and appetite of investors will be a critical success factor if they come into being.
The CFA Institute polled its 16,000 members residing in the European Union and Switzerland to bring the perspective of market practitioners and investors to the debate. Some 52% agreed that resolution of the eurozone sovereign debt crisis should require common issuance of sovereign bonds.
Many, however, underlined the fact that new financial instruments will not cure the structural issues of imbalances in trade and competitiveness and over-indebtedness of many member states.
Some see stability bonds as a “necessary but not sufficient” element of creating a viable solution for the eurozone crisis that would also require far-reaching structural reforms, fiscal integration and a strong common governance framework.
The risk of moral hazard, where some member states may follow poor budgetary discipline with limited implications for their financing costs, is also a key concern for members.
In terms of structure, 64% of respondents believe that, should sovereign bonds be commonly issued, the most effective approach would be joint and several guarantees. Using this approach, each member state would be responsible not only for its share of liabilities under the stability bond but also for the share of any other member state failing to honor its obligations.
Also, 64% support a partial substitution of stability bond issuance for national issuance versus a full substitution where a portion of government financing needs would be covered by stability bonds, the rest by national sovereign bonds. Some 65% of respondents support a gradual phase-in of stability bonds versus an accelerated approach.
For stability bonds to work, strict preconditions must be met. Clearly, CFA Institute members consider these preconditions to be essential elements of a solution to the current crisis.
• 86% support significant enhancement of economic, financial and political integration
• 88% back increased surveillance and intrusiveness in the design and implementation of national fiscal policies
• 74% endorse central approval of draft national budgets
• 84% back establishing ex-ante ceilings for national borrowing, limiting access to the stability bonds issuance to a specific percentage of each member state’s GDP
• 90% support limiting access to the stability bonds issuance if a participating member state does not comply with the rules and recommendations under a eurozone governance framework.
In regards to fiscal discipline, 25 of the 27 member states recently agreed a new treaty that aims to strengthen fiscal discipline by limiting public budget deficits and introducing further automatic sanctions and stricter surveillance within the eurozone.
Should this be enforced, some sceptical members will still need to be convinced of the benefits of the common issuance of sovereign debt.
Stronger member states, such as Germany, are clearly unwilling to pay for fiscally weaker and less disciplined member states.
Yet despite these obstacles, we may see the eurozone move towards eurobonds medium-term.
Agnés Le Thiec is director of capital markets policy at the CFA Institute
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