The proposed common sovereign bond for eurozone, if ever it materializes, will fall short of solving the region’s fiscal crisis, analysts have said.
Calls for the creation of a market for eurozone government bonds heightened following sequential bailouts of Greece and Portugal and the likelihood of a similar package for Portugal in future. Eurogroup head Jean-Claude Juncker and Italian Finance Minister Tremonti spearheaded the proposal though a similar move had been rejected earlier in the year. The proponents have argued that a common eurozone bond will calm the market's fears about the worsening debt crisis and shore up trust in the future of euro common currency.
They have said the common bond plan will lead to a 'liquid global market for European bonds' and send a message to the markets about 'the irreversibility of the euro'.
However, an analyst at Capital Economics has said the likelihood of the creation of a common bonds market was negligible. We are skeptical, however, that the idea will get off the ground. And even it does, it won’t solve all the euro-zone’s problems, wrote John Higgins in a note.
Foremost on the list of obstacles towards the creation of the proposed bond market is the stiff opposition from Germany. German Chancellor Angela Merkel has made it clear that she would not commit to a plan under which German taxpayer money will b used for guaranteeing the debt of all other eurozone governments.
Juncker and Tremonti had suggested the creation of a European Debt Agency (EDA) that could issue bonds backed by all member states, the proceeds of which would flow to individual euro-zone governments.
The creation of EDA will eventually fail on grounds of technical feasibility if not on legal grounds, the analyst said, though he confirms that the move will have its own benefits. He says EDA will substantially lower the borrowing costs of weaker countries in the eurozone and the common bonds will foster a greater sense of solidarity within the euro-zone and reinforce the message from policymakers that monetary union will not be allowed to fail. Thirdly, EDA can even lead to a deep and liquid market for the proposed ‘eurozone government bonds’ to rival the US Treasury market, Higgins says.
However, obstacles far outnumber the benefits, says the analyst. Higgins says the EDA could become unviable given that its funding costs would be higher than that of stronger members of the eurozone and because of the possibility that stronger countries will eschew the EDA to raise funds.
Even if the legal hurdles could be overcome, the EDA’s cost of funding would be higher than that of strong eurozone countries. Admittedly, stronger countries could continue to fund themselves by issuing debt in their own name. But this would hardly be a vote of confidence in an EDA and would curb the development of a deep and liquid market for such securities, Higgins wrote.
Also, countries like Germany would not like to see their financial exposure to their weaker neighbors rise by guaranteeing the debts accumulated by errant governments. For these reasons, we think that common euro-zone bond issuance is still a long way off, if indeed it ever comes to pass.
Higgins also argues that a common bond market will not solve the region's financial problems because it will have nothing in it to improve the inherent weakness of the debt-hit countries and increase their competitiveness. In particular, many countries would still have to undertake draconian fiscal tightening over many years, and indeed the pressure on them to get their public finances in order could be even greater if other governments were guaranteeing their debt.