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06 January 2012

ICMA Response to EC Green Paper on the feasibility of introducing stability bonds


ICMA focuses its comments on technical aspects of stability bonds' issuance, leaving aside questions regarding whether such issuance is, or is not, desirable. It also notes that Treaty change implications have not been considered when commenting.

The response comprises three integral parts. Part I presents a synthesised view informed by thinking from all parts of the value chain, drawing together a range of inputs provided by ICMA’s member firms which thus encompasses issuer, intermediary and investor perspectives. Part II has been prepared specifically by the buy-side ICMA Asset Management and Investors Council (AMIC). Given that the achievement of investor acceptance will be a crucial factor in the actual feasibility of any stability bond issuance proposal, ICMA considered it valuable to include this more focused segment providing the European Commission with tangible advice concerning these important buy-side specific viewpoints. Finally Part III offers a few more detailed thoughts on some of the many legal questions which will demand thorough scrutiny in case there is to be adoption of any scheme for the issuance of stability bonds.

The European Commission’s Green Paper on the feasibility of introducing stability bonds considers three approaches:

  1. the full substitution of stability bond issuance for national issuance, with joint and several guarantees;
  2. the partial substitution of stability bond issuance for national issuance, with joint and several guarantees; and
  3. the partial substitution of stability bond issuance for national issuance, with several but not joint guarantees.

In evaluating the respective feasibility of these three options, a rational starting point is to focus on the differences which exist between them. On this basis, ICMA considers that there are in fact just two major features to examine. These are:

  • “Full” versus “partial” substitution – being the difference between the approaches 1 and 2; and
  • “Joint and several” versus “several but not joint” guarantees – being the difference between the approaches 2 and 3.

ICMA notes that these are indeed identified as the “Main features” in Table 1 within the Green Paper, which goes on to explore that they have different effects upon a number of important considerations.

One element which makes the assessment of these effects particularly tricky is the fact that they will vary over time. In illustration of this point, ICMA  notes its experience that the same commentator can change his perspective, depending if the question being asked involves immediate adoption of one of these options; adoption only after a couple of years in which good progress has been made in easing tensions currently experienced in European Sovereign markets; or adoption following many further years of fiscal integration amongst the euro-area Member States.

ICMA believes that credibility, simplicity and certainty should be guiding principles in all cases.

“Full” versus “partial” substitution:

In assessing whether to pursue the path of full or partial substitution, ICMA considers that it is vital to give detailed consideration not just to the stability bonds but also to the remaining national bonds that must be anticipated in the partial approach. It should be possible to design an effective scheme accommodative of both, but this does require that the design of the stability bonds be tuned in a way which leaves appropriate space for any ongoing national bond requirements, which will themselves need to achieve adequate liquidity levels and be capable of being predictably funded. ICMA notes that it took many years for the US market to evolve its matrix of federal, state and local bond issuances.

One obvious point argued in favour of full substitution is that it creates the largest potential pool of obligations, which should in principle attract the greatest liquidity and create the most attractive benchmark. The better the benchmark, the more useful role it can play in support of other markets, such as corporate bonds and derivatives, which can be priced off of it. Nevertheless, ICMA recognises that beyond a certain point the incremental benefit of further increasing the size of the pool will become somewhat marginal. It may well be that the pool of stability bond obligations which would arise under a partial substitution approach would in itself prove to be quite large enough.

“Joint and several” versus “several but not joint” guarantees:

On the question of which guarantee structure to adopt ICMA perceives that a key consideration is credibility. This needs to be considered not just at the moment of issuance but throughout the life of the guaranteed obligations, which may of course stretch across periods of economic fluctuation. Accordingly, the design of Stability Bonds should factor in an element of stress, to generate confidence that it will be robust enough to persist. Relevant stresses to consider should encompass a range of economic scenarios, which should certainly include (but not be limited to) circumstances of rapid deterioration in the fiscal position of multiple Member States – much as has been witnessed over the course of the last couple of years.

Other approaches

ICMA also observes that whilst the Green Paper has focused on three specific options, there are quite a number of other related proposals which have been made. As work progresses, these should continue to be borne in mind, as each of their promoters may indeed have good insights which should be factored into the design of any proposal which may subsequently be selected for actual adoption.

Full paper



© ICMA


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