Eurobond – Answer To The European Debt Crisis?

(EU) German press reported several high ranking EU officials have been appointed to come up with a draft for a EU fiscal union including creating joint eurozone bonds to help countries pay for incremental deficit spending. Governments would only be able to decide how to spend money that is covered through their revenues. Note, previously German was against the bonds but is said to be warming to the idea. It also points to a body of finance ministers that would oversee the deeper union.


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How to interpret this headline?

It seems that Germany is finally warming up to the idea of Eurobonds as a solution to European Debt Crisis, but from the looks of this headline, we could see a combination of Eurobond approaches, and before we could analyze further, let’s take a look at the definition provided by Wikipedia:

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  1. Full eurobonds with joint liability: This option suggests to fully replace the entire national issuance by eurobonds, each EU member being fully liable for the entire issuance. According to the European Commission “this would have strong potential positive effects on stability and integration. But at the same time, it would, by abolishing all market or interest rate pressure on Member States, pose a relatively high risk of moral hazard and it might need significant treaty changes.”
  2. Partial eurobonds with joint liability: The second option would pool only a portion of borrowings, again guaranteed by all. This means EU member states would still partly issue national bonds to cover the share of their debts beyond a certain percentage of GDP not covered by eurobonds. The Commission does not state a specific volume or share of financing needs that would be covered by national bonds at the one hand and eurobonds on the other. However, the proposal is similar to that of the German Council of Economic Experts that proposed a European collective redemption fund, which would mutualize the debt in the eurozone above 60%, combined with a bold debt reduction scheme for those countries, which are not on life support from the European Financial Stability Facility.
  3. Partial eurobonds without joint guarantees: According to the third option that is similar to the blue bond proposal, eurobonds would again cover only parts of the debt (like option 2) but without joint guarantees. This could impose strict entry conditions for a smaller group of countries to pool some debt and allow for the removal of countries that do not meet their fiscal obligations. Due to “a mechanism to redistribute some of the funding advantages … between the higher- and lower-rated” governments, this option aims to minimize the risk of moral hazard for the conduct of economic and fiscal policies. Unlike the first two approaches, this would involve “several but not joint” government guarantees and could therefore be implemented relatively quickly without having to change EU treaties.

What German Press is reporting is probably a combination of Partial eurobonds with joint liability and Full eurobonds with joint liability (1 & 2), with a limit based on deficit spending / revenue or debt-gdp ratioThis is obviously a move in the right direction for the market, may not be that positive for the EU in the long run, but the attitude seems to be that whatever is needed to shore up market confidence, needs to be done…  We should monitor this closely in the future for EUR’s direction.

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About Henry Liu

My name is Henry Liu and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; it is my goal (and vision) to educate every trader on how to take advantage of news trading and become more balanced traders.

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