21 April 2012

The Economist: Can a limited version of eurobonds help solve the euro crisis?

One idea is to confine the maturity of eurobonds to short-term debt. Wim Boonstra, chief economist of Rabobank in the Netherlands, advocates a facility for eurozone countries to finance themselves for four years through jointly-guaranteed debt of up to two years in maturity - read more. This plan would exclude Greece, Ireland and Portugal while they are receiving rescue finance, but it would take the heat off Italy and Spain and provide their banks with a safe common asset. One snag is that it encompasses the very maturity at which their governments already find it easiest to borrow. Another is that by encouraging countries to issue debt at shorter maturities, the programme would create a bigger refinancing hump at the point when it was wound up.

A much more ambitious scheme from Bruegel, a Brussels-based think-tank, first outlined in 2010, would use the original Maastricht-treaty cap for public debt of 60 per cent of GDP—more honoured in the breach than the observance—to carve a dividing line between jointly-guaranteed debt and the rest - read more. National borrowings below the 60 per cent level could be switched into “blue” eurobonds, while the remaining “red” debt would remain the responsibility of individual states. The blue bit would cover around €5.5 trillion—a lot more than Mr Boonstra’s plan, and it would be for keeps. The main objection to this colour-coded proposal is that the resulting pressure on countries to reduce their red debt could backfire. The now-riskier tranche of borrowing would turn toxic, with yields on it soaring as borrowers priced in the higher risk of default. In the ensuing panic, the guarantee would probably have to be extended. The limit for blue debt would turn out to be as binding a constraint as the original Maastricht ceiling.

A third proposal—from the German Council of Economic Experts, an independent advisory group—recodes the colours and changes the intent - read more. Eurobonds would replace national debt above, rather than below, 60 per cent of GDP. This scheme would be smaller than Bruegel’s, covering around €2.3 trillion, and since its purpose is to redeem debt above the 60 per cent threshold, the fund issuing the eurobonds would eventually wind up—though that would take 25 years. The ultimate objective is manageable national rather than permanent joint debt.

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