Wolfgang Münchau outlines one possible scenario in today’s FT: a crisis-driven leap towards eurobonds, in the most toxic political circumstances possible.
Shamefully, it has taken me several weeks to realise the full import of the attached Irish Times piece by Garret FitzGerald. He has for many years sought to draw the attention of the Irish public to the role of the European Commission as defender of smaller states’ interests. Here he warns, in much more modest language than that with which I have entitled this entry, that the current German-French proposal for euro zone reform “represents a new attempt to bypass the union’s tried and tested decision-making system… There is a new danger that the decision-making system that for over half a century has sustained and kept in balance an inherently cumbersome union… may lose its hitherto carefully preserved cohesion, and for the first time become dominated by some larger states.”
Colm McCarthy has some trenchant remarks on Mr Sarkozy’s recent populist speech:
The FT is reporting that the Christine Lagarde is the latest high-level official to offer tentative support for bond purchases by the EFSF as a central element in the reform of liquidity support measures.
Christine Lagarde, French finance minister, said France was ready to discuss allowing the eurozone’s €440bn ($588bn) bail-out fund to start buying bonds of struggling European economies amid signs of consensus that it would become the primary new tool for tackling Europe’s ongoing debt crisis.
How significant a development would this be? The first thing to note is that ECB bond purchases have failed to bring market yields to affordable levels. While probably helping to a degree, the ECB’s secondary-market purchases have lacked commitment and provide no real certainty to investors on how high yields could rise. Secondary market purchases by the EFSF are unlikely to be much more effective unless operated at a very different scale.
In principle, however, official primary-market bond purchases could provide guaranteed funding at some maximum interest rate. This maximum rate could be set high enough to create strong incentives to rely on market funding. I would presume that the total amount of funding would be capped and the programme would have a time limit. But because they involve purchases of ordinary bonds, concern about the seniority of official creditors should be lessened. Overall, the existence of such an official buyer of last resort should give market investors reasonable confidence that governments would be able to roll over their borrowing as bonds mature over a significant time period. The proposal has the potential to provide support to a country facing difficult market conditions without crowding out longer-term private investors from the market; such crowding out appears to be a major shortcoming of current support measures.
Of course, the devil is in the detail, and there is little concrete yet about how such bond purchases would actually operate. It is also unclear whether these new facilities would be available to countries already in support programmes. But it is an interesting development.