Views on improving the integrity of global capital markets
10 January 2012

Will Stability Bonds Save the Eurozone?

The question is on all investors’ lips: How to save the euro and avoid breaking up the eurozone, which would be hugely detrimental to the economy as a whole — not only the European one — and investors in particular?

While repeated high-level summits of European leaders have proved unable to solve the sovereign debt crisis, EU public servants have been exploring possible ways to foster financial stability.

The most daring proposal is the common issuance of sovereign bonds among Member States of the euro area, investigated by a green paper from the European Commission. To inform our feedback to this green paper, we recently sought the opinion of our EU and Swiss members through a survey, to which 798 CFA Institute members responded.

While a slight majority of respondents (52 percent) agrees that resolution of the euro-area sovereign debt crisis should require common issuance of sovereign bonds, many underline in their comments that new financial instruments will not cure the fundamental problems of imbalances in trade and competitiveness and over-indebtedness of many Member States. Some also believe that the significant risk of moral hazard associated with stability bonds would create further systemic threats.

In terms of structure, 64 percent of survey respondents believe the most effective approach for the common issuance of sovereign bonds would be joint and several guarantees under which 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 percent of respondents support a partial substitution of stability bond issuance for national issuance, in which a portion of government financing needs would be covered by stability bonds, with the rest covered by national sovereign bonds. Lastly, a majority of respondents (65 percent) support a gradual phasing in of stability bonds.

But for stability bonds to work, strict preconditions must be met. A large majority of respondents view the following as necessary preconditions for participating Member States:

  • 86 percent favor significant enhancement of economic, financial, and political integration
  • 88 percent support increased surveillance and intrusiveness in the design and implementation of national fiscal policies.

This debate on the preconditions is important. As European leaders are drafting an “international agreement on a reinforced economic union”, the European Parliament is pushing to include in this text the adoption of “a road map towards creating the conditions that will allow them to issue part of their sovereign debt in common, with joint and several liabilities.”

We will see how this goes and if this proposal by the European Parliament manages to win over some highly skeptical Member States. Still, this could well be the first step toward common issuance of sovereign debt in the long term.

About the Author(s)
Agnès Le Thiec, CFA

Agnès Le Thiec, CFA, is a former director of capital markets policy at CFA Institute in Brussels.

9 thoughts on “Will Stability Bonds Save the Eurozone?”

  1. Doug Walouke says:

    It seems to me that the only way the Euro can survive is for member countries to continue to give up more and more of their sovereignty. I just don’t see the people accepting that fate and I see this ending ugly…I don’t know when, but it will end ugly.

  2. Charles Johnson says:

    The Articles of Confederation for the 13 American colonies failed just as the European Union is now because of the lack of any really unifying force other than economic benefit. The difference is the 13 colonies had the same roots, language and concern for the exterior threat, England. The EU has multi millennia of tribal animosities, vast cultural differences from north to south and no common exterior threat. Only the elites in Brussels have much interest in its success.

  3. The only way that all of this can work is, as Angela Merkel has clearly stated, if the sovereign states surrender their fiscal independence to a supra-governing body. Otherwise, ‘stability bonds’ are contributors to instability as anyone who can read a balance sheet already knows. To think that Germany would stand behind these things without having fiscal integrity first and foremost is mere wild imaginings. All these people who support them without that integrity are merely trying to evade coming to grips with the overriding debt problem that too much of Europe faces.

  4. zEESHAN says:

    Really nice article….

  5. Comman pepole is started his own business mareketing of bonds in own buying this not good thats why euro his loss..plz first control of aal this first.

  6. Agnes Le Thiec says:

    Thank you for your comments and observations, which highlight an acute concern about the risk of moral hazard associated with Stability Bonds. Obviously, the strict pre-conditions viewed by CFAI members as necessary to make the issuance of Eurobonds a success imply a major step in the process of European integration, and are therefore by themselves a major obstacle. They would mean a great step forward in terms of fiscal integration, and therefore a large transfer of sovereignty from the national to the central level – which implies a form of political union. This seems very difficult to achieve, and the downgrading of last Friday by S&P of 9 of the 17 eurozone Member States certainly won’t help, since it will make it even harder for stronger Member States such as Germany to accept Eurozone bonds.
    However, the Eurozone is in such a dangerously fragile position today that doing nothing does not seem to be an option either. Tackling the fundamental problems of imbalances in trade and competitiveness and public over indebtedness in several Member States at the root of the crisis will take time. An interesting paper by the think-tank Bruegel “The Euro crisis and the new impossible trinity” published today is looking at tackling the crisis on three fronts: (i) giving a broader mandate to the ECB (European Central Bank), which would become lender-of-last-resort for sovereigns, (ii) breaking the banking crisis-sovereign-crisis vicious circle through regulatory reforms and the set-up of a banking federation, and (iii) establishing a fiscal union with EuroBonds.
    The report is available at:
    http://www.bruegel.org/publications/publication-detail/publication/674-the-euro-crisis-and-the-new-impossible-trinity/

    Your views as market practitioners and investors on the challenges and opportunities associated with Eurobonds or any other mechanism or reform that could help address the euro crisis are welcome.

  7. Zhang Jian says:

    I personally believe Eur was a nice dream realized 11 or 12 yrs ago, but will be ended ugly as a nightmare. This result is defininitly Not what we want to see because of too much estimated turbulance to economy ahead.

  8. It seems that Germany is a bit closer to accept Eurobonds. Now it will be France to accept less fiscal independence.

  9. Agnes Le Thiec says:

    Dear Sir,

    You are very correct that German leaders now seem more inclined to consider Eurobonds in the longer term, but on the condition that significant progress in fiscal and financial integration has been achieved. Other countries on the other side are pushing for Eurobonds or other emergency financial support measures to happen quickly – even though some (including France) are wary of the loss of national sovereignty associated with EU financial support.

    You may be interested in the blog post published today on (i) the interest taken by the European Commission in the a CFA Institute members’ poll on Eurobonds, and (ii) the Crisis Management Directive published last week by the European Commission to enhance EU financial integration, and the consideration of a EU banking union in the future.

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