25 June 2013

Graham Bishop: Broadening Applications of the Temporary Eurobill Fund (TEF)

The Temporary Eurobill Fund (TEF) is a time-limited plan carefully structured to avoid opening its members to the virtually unlimited liability of guaranteeing all the debts of other members – as would happen in a mutualised pool of debt with 'joint & several' guarantees.

The Fund would issue a mixture of maturities but the maximum maturity would be two years. The Fund’s exposure to a State would be capped at [20-30%] of the State’s 'gross government debt' – giving a theoretical maximum size of around €2.5 trillion if all eligible states took full advantage of the permitted re-financing possibilities but its likely size would be perhaps €1.6 trillion. The TEF is entirely complementary to the ESM/OMTs and is a reward for stability. (See detailed paper - link)

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1) Simple and transparent: It does not require a change to the European Treaties and could operate within a year as it builds on the standard, long-existing functions of national Treasuries.

2) A safe and liquid asset to reduce the bank/sovereign nexus: The TEF’s securities would be seen by the banking sector (and insurance/companies) as exceptionally safe, and would be the most liquid in the euro area. The resultant boost to confidence would be growth enhancing.

3) A financial bridge to medium-term stability – for all euro area states. The TEF would give a credible financial bridge from the current crisis to beyond 2015, when euro area members are already committed by their Medium Term Objectives (MTOs) to achieve balanced budgets.

4) Easing the exit from a 'programme': States emerging from a Programme (Ireland/Portugal) would be supported by the eurozone at all parts of the yield curve given the recent extension of maturities. In return, they must observe the Country Specific Recommendations (which are just an envelope of the same policies as in a Programme but without the detail/monitoring.) This support would open the way to a steady re-entry into financial markets so that bond market discipline would operate progressively.

5) A public sector alternative to the bank-based payment system: An individual/company with an account at the TEF could make payments – perhaps via a phone - to anyone else with a TEF account by transferring part of their TEF balance to a new owner. So the European public sector would have provided an alternative payments system to the banks. The key reason for bailing out banks is that a failure of the payments system would cause economic meltdown. If there is a public alternative, then that particular reason is removed.

6) An alternative to a single deposit guarantee system is to provide a 'European governments' guaranteed financial asset that fulfils the functions of a deposit for citizens. The TEF would do exactly that. If a citizen chooses to hold a say €200k deposit with a bank in return for a slightly higher interest rate, then they have chosen to take the bank risk as there would be a safe alternative.

7) Foundation of a European Treasury: Debt managers might be well disposed towards the idea of a collective system to sell bills directly to the public. This would create cheaper funding for them and clearly create the basis of a European Treasury. With collective agreement, a state could extend its short-term debt and finance it from the TEF so giving the euro area a 'fiscal capacity'.

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© Graham Bishop