PARIS (MNI) – In a proposal that he acknowledged was “almost a
provocation,” European Central Bank Executive Board member Lorenzo Bini
Smaghi on Friday proposed the creation of a single agency to issue
government bonds for member states of the Eurozone.

Under the proposal, “the countries would in fact no longer have the
capacity, technically or politically, to issue public debt on the
market,” Bini Smaghi said in the text of a speech he delivered in Lucca,
Italy.

“This could be a first step towards a single European bond, which
would be emitted by the supranational agency to finance public budgets
of all countries, or those which share similar characteristics such as
the highest rating.”

He said the creation of such an entity could help avoid sovereign
insolvencies and defaults, which he argued should not be allowed.

European finance ministers would decide, according to specified
guidelines, how much debt the agency could issue and how it would be
distributed among individual member states, Bini Smaghi continued. “In
fact, by controlling the volume of emissions, the Council would have the
power to decide the budgetary balance of individual countries,” he
noted.

He noted that current EU rules already allow the finance ministers
as a whole to approve the budgets of individual countries. But while
that decision is not binding, the control of country debt issuance at a
supranational level would be, he said.

Bini Smaghi’s proposal is sure to raise some eyebrows, particularly
in Germany, which is vehemently opposed to anything resembling a joint
Eurobond.

Last fall, France and Germany tried to push through a proposal that
would have established a procedure for allowing countries to declare
bankruptcy and default on their debt.

“Fortunately, the idea has not gained acceptance, not only because
of the ECB’s dislike but also because of the devastating effect it has
had on financial markets,” Bini Smaghi said. “It will take time to
recover from the loss of credibility suffered by Europe with that
proposal.”

He said the Franco-German proposal was “based on the assumption
that the best way to discipline governments to ensure sounder public
finances is to make it easier for a country to declare bankruptcy…This
idea is mistaken for several reasons.”

With regard to his proposal for a joint debt-issuing agency,
“surely there is a need for more thought,” Bini Smaghi said. “But the
goal must be to make financial crises less likely.”

He also argued that the regulation of banks in the euro area needs
to be better harmonized, “to reduce the incentive for the national
supervisors to give preferential treatment to their national system
compared with what is done elsewhere in the union.”

Upcoming bank stress tests will be a “way to verify” whether the
new European regulatory agencies, which became operational this year,
are achieving a sufficiently harmonized regulatory system.

“The current decision-making system, based on consensus, tends to
favour the positions of those who discourage transparency, the
robustness of the tests, the flow of information,” Bini Smaghi lamented.

“If the results of the next stress tests do not convince the
markets that they have been done rigorously, national authorities will
not be able to hide behind each other; all would lose credibility,
including the newly created European Banking Authority.”

–Paris Newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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