Solving the Sovereign Debt Crisis: Are Eurobills a Viable First Step?
After pledging on 26 July to do “whatever it takes to preserve the euro”, European Central Bank (ECB) President Mario Draghi, after meeting with his Board yesterday, is expected to announce new interventions by the ECB on the sovereign debt markets. In fact, the worsening of the sovereign debt crisis — which has increased the likelihood of a partial breakup of the eurozone — makes it necessary for EU leaders to take bolder steps to tame it. One of the tools under consideration is the mutualisation of eurozone sovereign debt.
In November 2011, the European Commission published a consultation on the feasibility of eurobonds, also known as “stability bonds”. To inform our response to this consultation, CFA Institute polled its European members in January 2012, which caught the attention of EU regulators and legislators. The poll notably revealed that the common issuance of eurobonds could help alleviate the debt crisis, but only as part of a package of structural reforms, financial and fiscal integration, and a strong common governance framework. This view of CFA Institute members was common to the views expressed by many national and EU leaders.
However, with pressure from capital markets intensifying, an increasing number of these EU and national leaders are promoting a “roadmap” involving several steps towards issuance of long-term eurobonds. The first step would likely involve eurobills, or common issuance of debt with a maturity of less than one year. The idea is that eurobills would allow the eurozone to move towards common issuance of long-term debt while establishing the necessary safeguards and governance framework.
Clearly, the success of these eurobills would hinge on the attitude of investors. Therefore, CFA Institute decided to conduct a new poll of its European and Swiss membership in August 2012 to gauge their opinions on eurobills. The main findings of the poll, which generated feedback from 979 market practitioners and professional investors, are the following:
- The majority of respondents think that eurobills would be a pertinent first step towards the issuance of longer-term bonds (79 percent). About half said eurobills would facilitate the transmission of euro monetary policy (58 percent); help alleviate the current sovereign debt crisis (52 percent); and reinforce financial stability in the euro area (50 percent). However, many respondents underline that any commonly issued debt would not cure the structural issues of lack of growth, public deficits, and imbalances in competitiveness of many member states.
- Seventy-four percent of respondents said that, in order for eurobills to be effective, they would need to have a joint and several guarantee, under which each member state would be liable for its share of liabilities as well as the share of any other member state failing to honour its obligations.
- Sixty-three percent believe that, on average, eurobills would bear a lower yield than the average yield of nationally issued bills.
- An overwhelming 82 percent said conditionality is necessary to manage the risk of moral hazard, where some member states may have poor budgetary discipline and limited implications for their financing costs, thus keeping the yield of eurobills low. One possibility is to limit the access of a participating member state to eurobills in case of non-compliance with rules and recommendations under a euro-area governance framework.
As the discussions on the mutualisation of the sovereign debt in the eurozone are set to continue, trust that we will continue to share your views with leading EU legislators and regulators on this important issue.
If you liked this post, consider subscribing to Market Integrity Insights.
Photo Credit: ©iStockphoto.com/erhui1979