12th March 2012 –While the focus has been on addressing the urgent matter of Greece and the growing debt crisis, it’s all gone quiet on the suggestion of introducing Eurobonds to raise much needed cash in the EU. But analysts at Valbury Capital have been assessing whether the aptly named ‘stability bonds’ will bring stability and more importantly investors back to the Eurozone.
The Eurobonds plan would create rules for greater financial discipline with more control of the budgets of Eurozone countries. And while the Eurobonds would not avoid a repeat of the bailouts, it would reduce the pressure on troubled states to tackle their debt. The extent to which the creation of the Eurozone is more of a political move than anything which could be described as sound economic manoeuvring stretches deep into the abyss of New World ordering and global restructuring. Therefore, can anyone be surprised if and when the Eurozone doesn’t work, that investor sentiment towards the region is at an all-time low?
Owen Ireland, a broker at Valbury Capital says: “We are inclined to ask the question: what would be the true reason for the creation of Eurobonds? Is it to buy the ECB time to gather itself in order to resolve all the problems of the last few years? Or is it a step deeper into the maze of a unified Europe, and another nail in the coffin of the idea that the single currency experiment might one day be undone? “The creation of a bond could turn out to have been the right thing to do down the line, but for the time being the misalignment of individual states’ economies will be a thorn in the Eurozone’s side for some time. However, regardless of the reasons for its creation, any collectivised Eurozone-wide bond could provide an extra opportunity for speculating investors.
“Germany and other countries with high credit ratings could be hit by a rise in borrowing costs as the issuance would pool not only associated revenue flows but also debt servicing costs. That the bond’s function as a remedial entity may prove to be successful in years to come will not have any bearing on its trading characteristics in the meantime. It could be a very volatile instrument, as traders buy on German strength yet sell on peripheral members’ inevitable bad news. Trading ranges could be wide, but sheer abundant liquidity should keep the market from moving too fast to handle.” Features as described could well be hugely attractive to debt traders, and furthermore this amount of open interest will go some way to suppressing volatility. Owen adds: “It would only take a small amount of bad economic data from a handful of member states to start the snowball effect for all traders on one side of the market (quite probably on top of it). Yields could spike, and I doubt the core Eurozone countries would be passive and swallow their pride. Something would slip, somewhere.
“A sovereign bond of this nature is unprecedented. The Economics Committee have emphasised that the proposal needs to be attractive for triple-A countries, but despite any commitment to ‘fiscal coordination’ and ‘better economic governance’ it still feels like an elephant-in-the-room type of situation. Politics is getting its way over sound economics (in the short term at least) and the ECB may have to clench their teeth and look on as the newest economic experiment in town runs riot.”