CFA Institute Brings Investor Perspective to Eurobonds Debate
The debate over eurobonds — sovereign bonds commonly issued by member states of the eurozone — has intensified over the last couple of months, with several very high-level political leaders such as Christine Lagarde, managing director of the International Monetary Fund, and Italy’s new prime minister, Mario Monti, publicly supporting them. While the concept of eurobonds is not new, it is one of the most daring proposals to deal with the European sovereign debt crisis that has been raging for two years now.
EU leaders have been trying to circumvent this crisis by taking several actions:
- Granting emergency loans to Greece, Portugal, and Ireland
- Setting up a € 440bn temporary rescue fund — the European Financial Stability Facility (EFSF) — to provide support to countries in financial difficulties
- Putting in place a more permanent stability mechanism of € 500bn — the European Stability Mechanism (ESM), which should be in place by July 2012 to provide assistance to member states in financial distress, with a widened mandate to intervene on the primary and secondary markets and in banking sector recapitalizations
- In parallel, the European Central Bank (ECB) has been intervening on the debt markets by buying sovereign bonds. Last December, the ECB also introduced some € 489bn of liquidity into the European banking system, and is looking at providing nearly € 500bn of inexpensive three-year loans to European banks again this week.
Because an injection of money should not go without strengthened governance and fiscal measures, EU leaders are also moving on that front. They started by adopting in 2011 the first economic governance package, the so-called “six-pack”, which aims at strengthening the monitoring and surveillance of budgets and macroeconomic imbalances in the EU. A second economic governance package (the “twin pack”) proposed by the European Commission is underway. And in January 2012, 25 of the 27 EU member states agreed on a new treaty, the “fiscal compact”, which allows for more stringent monitoring and fiscal surveillance by the European Commission.
Yet all that does not seem to be sufficient to circumvent the crisis. Indeed, many have been calling for much bolder steps and actions by EU leadership to deal with it. This is why the debate on eurobonds is gaining momentum. In November, the European Commission launched a consultation on the feasibility of eurobonds (which it rebranded as stability bonds).
CFA Institute Convenes Experts to Discuss Eurobonds Debate
As the success of these stability bonds would hinge critically on the attitude of investors, CFA Institute polled its members in the European Union and Switzerland on the subject, and got feedback from 798 members. One of the results of the poll was that a slight majority of respondents agrees that resolution of the euro-area sovereign debt crisis should require common issuance of sovereign bonds, but 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. To further share the feedback of market practitioners and investors with key policymakers, we organized a panel discussion in Brussels on 20 February.
During this event, two experts who published research on the subject of stability bonds — Sander Schol, director at the Association for Financial Markets in Europe (AFME), and economist Jacques Delpla, a member of the French Conseil d’Analyse Economique (CAE) — discussed in depth the various possible options of structuring eurobonds. Bruno Colmant, president of the CFA Belgium Society, presented the results of the poll conducted among European CFA Institute members on the issue, and Peter Grasmann, head of the unit of the European Commission in charge of the consultation of stability bonds, shared with the audience how the EU had been taking steps to respond to the sovereign debt crisis using short-term instruments (removing uncertainties about the second programme for Greece, undertaking credible adjustment in other vulnerable countries, ensuring a sufficient capitalization of European banks, and putting in place sufficiently large “firewalls” (i.e. EFSF and the ESM) to avoid further contagion of the sovereign debt crisis) and longer-term instruments (reforming the framework for economic governance in the euro area and implementing policies to underpin economic growth). He also hinted that eurobonds, if they materialize, could play a role beyond the crisis, notably by creating a large, liquid, and integrated EU sovereign debt market which could play a major role as anchor in global financial markets.
All speakers around the table, like CFA Institute respondents to the poll, agreed again that strict pre-conditions regarding fiscal integration and governance had to be in place before eurobonds could be successfully issued (and purchased by investors) — making it unlikely to happen in the very short term.
For the moment, EU leaders are negotiating quite hard to increase the size of the ESM beyond its current € 500bn, as a “firewall” to prevent contagion of the sovereign debt crisis to Italy and Spain, and to restore confidence in the markets. Meanwhile, Germany has been fighting against an increase in the size of the ESM but may be softening its position as it becomes more and more isolated. In fact, its traditional allies of Denmark and Finland now appear ready to back an increase. It looks like increasing the size of the ESM firewall will be the main objective of the European Commission in the coming weeks. But one may reasonably foresee that, should eurobonds continue to win public support from high-level political leaders and further progress be made on the governance front, the Commission will be ready to proceed more forcefully on the eurobonds debate.