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This article describes the efforts of several European Union countries to agree to issue "corona bonds" or "Eurobonds", which are a joint EU mechanism to issue joint debt shared between different countries. This measure is being proposed in order to "mitigate the economic impact of the coronavirus". It says:

“We need to recognize the severity of the situation and the necessity for further action to buttress our economies today,” the heads of state of Italy, France, Belgium, Greece, Portugal, Spain, Ireland, Slovenia and Luxembourg said Wednesday in a joint letter seen by CNBC.

[...]

“We need to work on a common debt instrument issued by a European institution to raise funds on the market on the same basis and to the benefits of all Member States,” the nine heads of state said.

Given that there doesn't seem to be any restriction on European Union countries issuing their own government bonds, what are the benefits of these new proposed instruments over this conventional measure?

  • Has there been any serious doubts why Eurobonds have benefits to high-debt countries? The baseline assumption appears to be that Eurobonds have an interest that lies between the low/negative rates of low-debt countries in the North, and high rates of high-debt countries in the South. So the first conclusion is that they're a benefit to the latter country, at the expense of the former countries. It may not be a direct financial transfer , but it amounts to billions and billions in indirect subsidies. – MSalters Apr 2 at 16:10
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Expanding on the answer by Tin Nguyen, the Euro is a a common currency for nations with separate economic policies and separate national debts. Being a member of the Eurozone stops nations from devaluating their currency to compensate for changing economic fundamentals.

Before and during the 2007 financial crisis bonds from e.g. Greece or Italy had a risk premium compared to German bonds despite the fact that both were government bonds in the same currency. There were even signs that futures traders were driving this premium up by betting against certain governments, or on nations leaving the Eurozone. The famous "whatever it takes" speech by Draghi calmed that.

The financial consequences of the Corona pandemic are not yet known, but it is clear that Italy and Spain will be hit hard. That will increase the risk on a default on national debt which increases the interest which investors demand. Of course that further hinders economic recovery.

If the Eurozone members jointly guarantee bonds, that lowers the interest payments for the less stable economies and possibly increases the interest for the more stable ones. This might or might not be to the benefit of the EU as a whole and the stronger members individually (since they all benefit from a strong Eurozone), but the more or less clearly voiced suspicion is that Corona is used as an excuse to enact a permanent transfer mechanism.

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    "The more or less clearly voiced suspicion is that Corona is used as an excuse to enact a permanent transfer mechanism." - This is pure (and malicious) speculation. Do you have any source to claim that this is an actual suspicion and, if so, that it is a reasonable one? – Alberto Santini Apr 2 at 12:16
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    @AlbertoSantini, regarding sources for existing suspicions, here. The suspicion doesn't have to be reasonable to affect policy as long as politicians and journalists repeat it to each other, and they do.. – o.m. Apr 2 at 14:46
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    @AlbertoSantini: As o.m notes, the suspicion is real. Dutch article, generally pro-Europe newspaper. In summary, "Southern countries use every crisis to try to create a transfer union, and Corona is no exception". This is not a new sentiment, the same was heard around Brexit. The Dutch just offered a billion Euro's one-time just to avoid a permanent transfer union. – MSalters Apr 2 at 16:20
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It's backed by a larger collective. Government bonds are regarded as safe but if a government goes bankrupt those bonds become meaningless.
The Euro bond is a common debt affecting all EU members and it is in everyone's interest on eventually paying that debt.

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Italy has a debt/gdp ratio of 1.35 which is so high that any common economic downturn brings it to the brink of default. (Yes, there are some countries with an even higher ratio which are still considered reliable debtors, notably Japan. The main distinction that makes Italy appear unreliable is its level of political instability and corruption.)

The economic fallout of the corona pandemic is not your common downturn though. Here is a quote from the New York Times:

“Economic data in the near future will be not just bad but unrecognizable,” Credit Suisse said in a note on Friday.

Italy simply has neither the political nor the economic means to cope with this crisis. That's why nobody in their right mind would buy Italian bonds now. Or, to be more precise, investors would only buy them at an interest rate unaffordable to the Italian — or any — government.

The first benefit is that Italy is able to obtain affordable credit at all, which it needs as badly as any other country right now.

A default of Europe's South and the collapse of the common currency and potentially the Union is an incalculable threat to the European and world economy, endangering not only Italian bonds but investments in Europe and beyond, across the board. To prevent it is therefore the prime directive of all economic politics right now.

Europe as a unit is more stable and is currently expected to be able to shoulder Italy's credits. Therefore, Europe will be able to sell bonds at lower interest rates. A common bond would also be a palpable commitment of the rich members, particularly of Germany, to do "whatever it takes", as Draghi famously said in 2012, to preserve the union.

This commitment calms investors, enables them to provide much-needed credit (a general refusal to lend was a major problem in the post-2008 financial crisis) and last not least lowers interest rates also for Italy on its own.

The second benefit is to guarantee political and economic stability so that the economy continues to function, financially and otherwise.

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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.

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Basically, the countries that have been more affected by the coronavirus and that will have to dedicate more money to mitigate the effects of it are countries with a high amount of debt, so they are viewed as more risky investments and they sell debt at a higher interest.

So, these countries are asking for the bonds to be issued with the backing of the whole European union with the idea that these bonds would be a more secure investment (as "rich" countries like Germany and Finland would also be issuing the bonds) and have to pay a lower interest.

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