Thursday, 24 November 2011

Like a boss: about the upcomming Euro-bonds

When mentioning the possibility of a joint euro-bond a few years ago the audience would have almost instantly burst into laughter and the one bringing it into discussion would probably have realised what a fool he suddenly looked like. Not anymore, peeps, as the French President Sarkozy is pressing for allowing the European Central Bank to issue joint bonds in order to stop the "stampede against European debt". This move comes after yesterday, Germany has failed to auction 10 year Bunds (considered the most safest debt instruments in the entire Eurozone) with a bid/cover rate of only 1.07 and an actual bid of 65% of the 6 billion asked. The rest of 35% had to be covered by the German Bundesbank. As Germany is finding it harder and harder to borrow at such low yields, the only way to stop the bloodbath will definitely be to monetize through the European Central Bank.


Amidst the first Portuguese general strike this a year, which has frozen the airports and metro-system, yields have reached 12.14% and the stockmarket PSI-Index fell to 5261.30. The sovereign debt of Portugal has been cut by the Chinese rating agency Dagong and by the US based rating agency Fitch to junk status (BB+) as a result of a higher risk of "deepening recession" which makes it "much more challenging" for the government to address the budget deficit.


The German 10 year yield has seen better days and it looks like it is forming a technical chart pattern called "double bottom". More failed auctions like the yesterday's and it may mean higher yields and higher debt service rates.

Why Euro-bonds

 Allowing the European Central Bank to issue joint Euro-bonds would mean that peripheral countries like Greece, Italy and Portugal would be able to "borrow" Germany's credit rating when raising debt. This means that the entire European credit rating would average out and German would also finance itself at higher rates due to the lack of creditworthiness of other countries.

The power to issue Euro-bonds would also mean a step forward towards the monetization of European high budget deficit countries. This means that the ECB will purchase the debt with freshly created out of thin air Euros.

Even with Sarkozy's insistence and pressure coming from Angela Merkel, the leading German party does not want to hear anything about these joint-euro bonds and debt monetization, as fears of Weimar Republic style hyperinflation still looms around. From Bloomberg:

The German government today stood by its rejection of any common bonds for the euro bloc following a report in Bild newspaper that Merkel’s coalition is concerned it may have to agree to euro bonds under certain conditions. The newspaper didn’t say where it got the information.
“We say ‘no’ to euro bonds,” Roesler, who is also vice chancellor, said today in parliament. “A transfer union would be wrong because it would mean German taxpayers pick up the costs. Euro bonds are wrong because they would mean a rise in interest rates for Germany.”

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