The Issuance of Stability Bonds Will Stop Spiraling Euro Crisis
As the EU debt crisis spirals out of control, the EU Commission on November 23rd issued its Green Paper on the feasibility of issuing Stability Bonds. Commenting on the paper Guy Verhofstadt, leader of the ALDE in the EU Parliament, former Belgian Prime Minster and a fierce proponent of a euro bond market affirmed, "Certainly I think its the only way to solve the euro crisis because all of the half measures that have been taken in the last two years didn't resolve the crisis. The only way forward, the only solution, is to create a euro bond market."
Within the last few days Fitch cut Portugal's credit rating to junk, Moody's downgraded Hungary's to junk, the S&P downgraded Belgium down a notch to AA and more countries are rumored to hit the downgrade charts next.
According to Mr. Verhofstadt, "all of this can be neutralized as fast as possible" because an EU bond market "can stop the crisis." He is not alone in his assumptions.
The EU Commission's Green Paper view EU wide bonds as "a viable alternative to the U.S. dollar bond market." They will foster integration of the European sovereign debt market, lower borrowing costs and increase liquidity and budgetary discipline with the Stability and Growth Pact (SGP). In addition, they will promote coordinated structural reforms and make capital markets more stable, which will foster the idea of the euro as a global "safe haven."
The issuance of Eurobonds requires a further move towards a common economic and fiscal policy, which the EU is moving ahead with formalizing.
The aim of Eurobonds is to reduce sovereign debt. They will also prevent speculation against the euro. The prospect of Stability Bonds could potentially alleviate the current sovereign debt crisis, as the high-yield Member States could benefit from the stronger creditworthiness of the low-yield Member States.
The Green Paper proposes that Stability bonds:
* Will make the euro-area financial system more resilient to future adverse shocks and so reinforce financial stability.
* Will help to smooth market volatility and reduce or eliminate the need for costly support and rescue measures for Member States temporarily excluded from market financing.
* Will provide a source of more robust collateral for all banks in the euro area, reducing their vulnerability to deteriorating credit ratings of individual Member States.
* Will create a larger pool of safe and liquid assets. This would help in ensuring that the monetary conditions set by the ECB would pass smoothly and consistently through the sovereign bond market to the borrowing costs of enterprises and households and ultimately into aggregate demand.
* Will lead to lower financing costs for both the public sector and the private sector in the euro area and thereby underpin the longer-term growth potential of the economy.
* Will strengthen the position of the euro as an international reserve currency.
Germany's "five wise men" of economic experts who advise Angela Merkel helped draft proposals within the Green Paper. If the Commission, the wise men and Mr. Verhofstadt are correct, EU Stability Bonds will not only put a stop to the crisis, but will also set the stage for the Euro to take up the torch from the US as the world's reserve currency should the US economy fail to recover from its crisis and reduce its deficit, which will further erode the stability of the U.S. dollar.