MacroScope

Joint euro bonds: the inconvenient truth

August 18, 2011

German Chancellor Angela Merkel and French President Nicolas Sarkozy kept a distance from the idea of a common sovereign euro zone bond on this week, with France hinting only that it could be a possibility in the very distant future.

But a Reuters poll shows a growing field of investors and economists say a common bond issuance would be the best — and perhaps the only — way of solving the debt crisis. In theory, it would allow highly indebted euro zone countries to regain access to commercial markets, while providing investors a safeguard through joint liability.

More than that, those analysts think Europe’s leaders may soon have to bow down to market pressures and issue a common bond as soon as 2012 or 2013.

It wouldn’t be the first time that policymakers caved to the markets.

In early August, after the European Central Bank looked like it would resume its Securities Markets Programme only to buy Portuguese and Irish bonds, one trader said:

What’s going to stop us attacking Spain and Italy over the summer months? Because I can’t think of anything.”

And so it turned out. Italian and Spanish bond yields continued to rise above 6 percent towards levels beyond which investors expected funding costs to become unsustainable. Some weeks later, the ECB caved and began to buy Italian and Spanish debt in the secondary market.

Now some 41 out of 59 economists polled by Reuters said a common euro zone sovereign bond would be a good long-term solution to resolving the crisis, with 36 out of 60 analysts expecting euro zone leaders to eventually agree to its issuance. A majority of those analysts expected the first issuance over the next two years.

Matteo Regesta, a rate strategist at BNP Paribas summed up nicely the tendency for policymakers to eventually give in to the market:

“Sometimes the market is the discipline of policy which often is behind the curve.”

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