The real question is whether the ECB isn't effectively doing this (i.e. offering a joint guarantee) already. Some [investment] bankers think so; news from March 26:
Yields tumbled from Germany to Italy, while Greece was the outright winner, after the central bank scrapped issuer-wise limits on debt purchases under its new 750 billion-euro ($821 billion) emergency program aimed at combating the coronavirus impact. The move removes a major hurdle to the institution’s ability to load up on euro-area debt. Yields slumped further after the number of Americans filing for unemployment benefits jumped to a record 3.28 million last week.
The ECB said that it had started purchases under the new program Thursday. Italy’s yield spread over Germany, a key gauge of risk in the country, erased this month’s dramatic gains.
The so-called issue limits -- which constrained ECB bond buying to a third of each government’s debt -- “should not apply” to the emergency plan, the central bank said. In addition, the program would also include bonds with shorter maturities than under its ongoing quantitative-easing operations.
“It is fully flexible -- so no restrictions on bonds and issuer limits, and there’s an increased maturity range,” said Jens Peter Sorensen, chief analyst at Danske Bank AS. “So the ECB can pretty much do whatever they want.”
The yield on 10-year German bonds fell seven basis points to minus 0.33%, while Italy’s yield premium fell nine basis points to 171, having touched 323 this month, the highest level since 2018. Greece’s 10-year debt is eligible for ECB purchases under the new program. Its yield plunged 64 basis points to 1.72%.
It marks a dramatic turnaround in the fortunes for peripheral bonds since the ECB’s last official meeting, when President Christine Lagarde prompted a selloff after saying the institution wasn’t there to close spreads.
Over the past two weeks, the ECB has cleared the way for several new measures that directly support the region’s most indebted nations, including more QE and the possibility of crisis-era Outright Monetary Transactions.
“Normally, legal texts are only for ECB nerds, this time the changes were significant,” said Jan von Gerich, chief strategist at Nordea Bank AB. “They can push spreads where they want to in the short term.”
For Jamie Costero, a rates strategist at UBS Group AG, the scrapping of the rules should also help to ease some of the liquidity issues faced by traders since the coronavirus crisis, which has caused prices to swing wildly.
“Dealers can offload risks with the ECB comfortably and help to provide liquidity to the market, which is much needed,” he said. “This is huge.”
But this ECB "scheme" could come crashing down next month when the German courts have to rule on it:
Yet there’s something surreal about the current battle over QE’s political constraints in that it could all be made irrelevant as early as May, when a German court is due to rule on the constitutionality of QE. Many expect the judges to vote that it’s unconstitutional. European governments would then be faced with a possible choice of abandoning the euro or coming up with real reform that takes the monetary union a step further, say through the issuance of a Eurobond.
Which is why a more stable legal environment (like "corona Eurobonds") would help.
For a bit more background, the OMT (Outright Monetary Transactions) is the legal instrument devised during Mario Draghi's tenure to back up his "whatever it takes" statement during the Eurozone crisis of 2012. The OMT has already been challenged in German and EU courts, but ironically it has survived in part because it hasn't been used, so some of the claims against it were dismissed as not actually having a (concrete) standing like actual damages/losses incurred by someone as a result of OMT. But at the same time the courts ruling on the OMT have tried to circumscribe its future application:
Since, against this backdrop, the OMT programme constitutes an ultra vires act if the framework conditions defined by the Court of Justice are not met, the German Bundesbank may only participate in the programme’s implementation if and to the extent that the prerequisites defined by the Court of Justice are met; i.e. if
- purchases are not announced,
- the volume of the purchases is limited from the outset,
- there is a minimum period between the issue of the government bonds and their purchase by the ESCB that is defined from the outset and prevents the issuing conditions from being distorted,
- the ESCB purchases only government bonds of Member States that have bond market access enabling the funding of such bonds,
- purchased bonds are only in exceptional cases held until maturity and
- purchases are restricted or ceased and purchased bonds are remarketed should continuing the intervention become unnecessary.
Precisely defining the "exceptional circumstances" was not done in those prior decisions (on OMT) so any future/actual use of "whatever it takes" could be challenged again in courts on concrete terms/basis. Etc. So, DW has commented on the (apparently never-ending) QE lawsuits in the EU
When Germany's Constitutional Court judges on Tuesday begin two days of hearings on a ruling regarding the European Central Bank's (ECB's) once massive bond buying program, they might feel like being stuck in a time loop similar to the Hollywood blockbuster "Groundhog Day."
For a bit of an analogy, here's a [relevant] quote from Krugman's 2012 "Revenge of the Optimum Currency Area", regarding the (automatic) transfers to Florida during the Great Financial Crisis aftermath:
Let’s once again take a not at all hypothetical example: Florida, after
the recent housing bust. America may have a small welfare state by
European standards, but it is still pretty big, with large spending in particular
on Social Security and Medicare—obviously both are a big deal
in Florida. These programs are, however, paid for at a national level.
What this means is that if Florida suffers an asymmetric adverse shock,
it will receive an automatic compensating transfer from the rest of the
country: it pays less into the national budget, but this has no impact on
the benefits it receives, and may even increase its benefits if they come
from programs like unemployment benefits, food stamps, and Medicaid,
which expand in the face of economic distress.
How big is this automatic transfer? Table 2 shows some indicative
numbers about Florida’s financial relations with Washington in 2007,
the year before the crisis, and 2010, in the depths of crisis. Florida’s
tax payments to DC fell some $33 billion; meanwhile, special federally
funded unemployment insurance programs contributed some $3
billion, and food stamp payments rose almost $4 billion. That’s about
$40 billion in de facto transfers, some 5 percent of Florida’s GDP—and
that’s surely an understatement, since there were also crisis- related increases
in Medicaid and even Social Security, as more people took early
retirement or applied for disability payments.
You might argue that since Florida residents are also US taxpayers,
we really should not count all of this as a transfer. The crucial point,
however, is that the federal government does not currently face a borrowing
constraint, and has very low borrowing costs. So all of this is a
burden that would be a real problem if Florida were a sovereign state,
but it is taken off its shoulders by the fact that it is not.