–Urge EU Leaders To Take Up Proposal This Month
–Adds Reports Of IMF Pressure For Larger Bailout Fund, ECB Bond Buys

BEIJING (MNI) – The European Union should create a single sovereign
bond issuing agency for the entire region to help calm market concerns
over debt among Eurozone peripheral states and lower borrowing costs,
Luxembourg Prime Minister Jean-Claude Juncker and Italian Finance
Minister Giulio Tremonti wrote in an opinion piece published in Monday’s
Financial Times.

Given continuing market “stress” related to European sovereign
debt, “Europe must formulate a strong and systemic response to the
crisis, to send a clear message to global markets and European citizens
of our political commitment to economic and monetary union, and the
irreversibility of the euro,” said Juncker, who chairs the Eurogroup of
eurozone finance ministers, and Tremonti.

They urge the creation of “E-bonds,” issued by a new European Debt
Agency (EDA), which would have a mandate to “gradually” issue debt up to
40% of the GDP of the EU and each member state. Over time, they envision
the E-bond market reaching liquidity comparable to that of the U.S.
Treasury market.

To create a “deep and liquid” market in the near term, the EDA
should be charged with issuing debt up to half of the planned new
issuance of each EU member state, and up to 100% for those states whose
access to debt markets is impaired, the ministers propose.

In addition, the EDA should offer a “switch” between E-bonds and
existing national bonds. “The conversion rate would be at par but the
switch would be made through a discount option, where the discount is
likely to be higher the more a bond is undergoing market stress,” they
say.

The EDA would use profits from the conversions to reduce effective
E-bond interest rates, so that “EU taxpayers, and those member states
currently under attack, would not have to foot the bill.”

“Knowing in advance the evolution of such spreads, member states
would have a strong incentive to reduce their deficits. E-bonds would
halt the disruption of sovereign bond markets and stop negative
spillovers across national markets,” they wrote.

In an effort to win over German support for the plan, Juncker and
Tremonti propose that the new E-bond include a clause ensuring that
private bondholders “bear the risk and responsibility for their
investment decisions.” The Germans have championed the idea that private
bond investors must pay their share of any default or restructuring.

Still, Germany remains opposed to creation of an EU sovereign bond
market, German weekly magazine Der Spiegel reported Sunday. Given that
rates on E-bonds would reflect perceived risk across the entire EU,
German borrowing costs could rise compared to existing benchmark Bunds.

There are growing concerns among German government officials that
after Greece and Ireland another Eurozone country could run into
financial trouble even before Christmas and that the existing EU rescue
funds won’t be large enough, Der Spiegel said.

Rather than creating an E-bond market, German government officials
are now pondering the possibility that all Eurozone countries could
guarantee the government bonds issued by each member state, the magazine
claimed.

German Finance Minister Wolfgang Schaeuble said Friday that
financial markets are currently not speculating against individual
Eurozone countries but are rather doubting the sustainability of the
European Monetary Union as a whole.

Although Germany’s longstanding rejection of an E-bond makes it
unlikely, pressures are mounting on the Eurozone to restore trust in the
sustainability of the currency union by stepping up support measures.

The International Monetary Fund (IMF) on Monday will call on
Eurozone governments to increase funds available under the European
Financial Stability Facility (EFSF) while pressuring the European
Central Bank to further step up its government bond purchases, news
agency Reuters reported, citing an IMF report.

There is a “strong case for increasing the resources available for
this safety net and making their use more flexible, including for the
purpose of providing more effective support to the banking system,” the
document said. The ECB bond buys should be “expanded” in the face of
systemic uncertainties.

IMF Director General Dominique Strauss-Kahn will present the report
at a meeting of Eurozone finance ministers and ECB President Jean-Claude
Trichet later today.

Belgian Finance Minister Didier Reynders on Saturday also suggested
increasing EFSF funds — a more likely scenario than the issuance of
E-bonds — reflecting the growing urgency among policy makers to thwart
off contagion from Greece and Ireland.

However, Spain’s Finance Minister Elena Salgado, said in an
interview with France’s Les Echos, published Monday, that her country
would not need to seek aid from the EFSF and that increasing the size of
the facility should not be the focus of European policymakers.

beijing@marketnews.com
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