Hellwig/Philippon: Eurobills, not eurobonds

02 December 2011

This column argues that the eurozone needs eurobills, i.e. debt of maturities less than a year. Issuing eurobills – up to 10 per cent of eurozone GDP – would help with crisis management as well as financial regulation and monetary policy, while minimising the risks of moral hazard.

How the proposal would work

• First, eurozone countries set up a joint debt management office (DMO) to issue the Eurobills. The DMO is the only issuer of short-term bills for all eurozone countries. The DMO manages issuances and redemptions, and monitors the allotments of each country. Before the beginning of each quarter, the Treasuries of the eurozone countries submit their schedules for issuances of all debts whose liability is less than a year. At the beginning of the quarter, the DMO issues eurobills to cover the needs of all countries over the course of the quarter. On the dates where individual Treasuries would normally conduct their own auctions, the debts are simply bought directly by the DMO.
• The eurobills auction: the DMO conducts auctions to satisfy the needs of all eurozone countries, subject to the constraint that no country can ask for more than 10 per cent of its GDP in any given year. A practical issue is what to do with the unbid amount, if there is any. The authors propose to follow the German model. In Germany, the Bundesbank steps in to retain any unbid amount. In this proposal, the ECB would do the same for eurobills.
• Eurobills are the joint-and-several liabilities of the eurozone. Given the proposal to follow the German model, there is no technical issue of failed auction, but the ECB is obviously not meant to be the ultimate buyer of eurobills. If, for whatever reason, the ECB ends up retaining some eurobills, the Member States must repurchase them within one quarter. Should a Member State be unable to fulfil its obligations, other states are required to step in and increase their own repurchase.
• Participation in eurobills emissions is conditional on satisfying criteria of economic governance and budgetary discipline. Countries are not allowed to issue any more short-term debt on their own. They continue issuing their own debt for maturities of two years and more.
• European banking regulators announce that eurobills are the main (perhaps the only) level 1 sovereign asset for liquidity ratios (Basel III).
• Eurobills can be phased in as soon as the DMO is created. Countries do not need to change their planned issuances. All that happens is that these issuances are now pre-funded by eurobills auctions as described above.

Conclusion

European integration is always easier when it can be done in small steps, especially in the midst of a crisis.

If joint-and-several liability debt is to be part of the solution, then the authors' argument is that eurobills are the instrument that minimise moral hazard and therefore should be considered first.

A market for eurobills can start small, improve financial stability and banking regulation, and provide much needed liquidity to solvent countries. In all these respects, eurobills fit the bill.

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