The argument for and against European debt mutualisation continues to loop round and round with no workable solution in sight. The eurozone crisis prompted calls for eurobonds. The refugee crisis led to the suggestion of refugee bonds. Now the coronavirus pandemic has raised the idea of coronabonds.
On one side: Italy, Greece, Spain, Portugal, Ireland, Belgium, France, Slovenia and Luxembourg support the idea. Germany, Austria, Finland and the Netherlands reject it. Countries with high borrowing costs are the most passionate supporters of joint bond issuance, arguing that it is the final piece of financial integration needed to create a real union. More financially secure countries tend to oppose it.
Coronabonds could help countries hit hardest by the pandemic to access cheaper funding. As the crisis continues, the gap between German and Italian bonds is rising. On Wednesday the spread reached 213 basis points. A 10-year bond issued at a midpoint between German and Italian bonds would have a yield of 0.15 per cent, a far lower rate than Italy will find elsewhere.
Caveats might be added. Ensuring money raised does not tip any individual country’s deficit above a certain point, for example. Or a requirement that collective debt is senior to an individual country’s sovereign bonds.
Both come with their own problems. Creating newly senior bonds would likely raise yields for a country’s other sovereign bonds. Deficit limits tend to be broken in a crisis. Right now, government growth projections are being torn up as economies are paralysed by lockdowns.
The European Stability Mechanism, created to help countries struggling to issue sovereign bonds during the eurozone crisis, already issues bonds. A form of pan-European debt already exists. But accessing the financing comes with conditions.
Italy is not yet shut out of markets. Yields on 10-year bonds are far from the 7 per cent they reached during the debt crisis in 2011. The European Central Bank has already made record asset purchases in a bid to keep credit cheap.
Until Italy is blocked from borrowing in credit markets, the idea of a pan-European bond will remain just that — an idea. If the eurozone crisis did not result in debt mutualisation, there is little reason to think the coronavirus pandemic will.
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Source: Economy - ft.com
