The ESM (European Stability Mechanism) is simultaneously the most boring and most exciting entity in Europe. For some, it offers a route to the panacea of Eurobonds and the EU’s next step Ever Closer while to others it is just a rescue entity and another mechanism to assert Brussels domination over wayward faux European countries.
The possibilities are endless, or so the saying goes, and that makes me closer to the panacea end of that spectrum. There is such a wide gulf between what investors would like, what the electorate would like and even what politicians would like, depending on whether they are wearing their campaign-hat or their bond-issuance-hat, that while the possibilities may be endless so might be the road to Eurobonds.
So does the EU need a Eurobond? Depends on who you ask.
Investors: Do they trust the EU and its collective actions? If you really trust them, buy Greece and enjoy the pick up over bunds. Not a lot of folks would sign up to that deal. On a different note, I do think there is some value in Greece vs Italy if you could get around Greece governance issues and EU involvement. I’ve got more faith in a Greek turnaround than an Italian one at the current juncture.
But I can imagine that the market is looking for a rationale risk free asset ie Eurobond. If you need high quality assets but puke a bit in your mouth every time you invest at negative yields, Eurobonds sound attractive. But there are also a host of supras and agencies that are highly rated and offer some pick up to their sovereign counterparts. If you aren’t looking at them and waiting for Eurobonds to offer you a safer but still yieldy asset, you might be in trouble. And honestly if you are still complaining about negative yields, you have bigger problems.
Also looks like 10 YR bunds are headed that way. So buckle up.
Issuers: What’s the EU’s incentive to get Eurobonds off the shelf? Besides investor demand, not a lot. Investor demand has driven a lot of financial product innovation, so I won’t pretend that isn’t a strong force, but I don’t think it is enough to get this one over the line. But maybe it is more sophisticated than that.
Eurobonds could drive support for the Euro and increase Euro usage. It also creates a new option for both investors who want European exposure but also European financial institutions that need assets for the Liquidity coverage ration (LCR). Would it be a back-door way to get the mutualized issuance than everyone right off the bat doesn’t want?
It is an interesting proposition, but it takes us squarely back to the lack of widespread enthusiasm for the concept so that it is unlikely the hard work needed to get the ESM in place to issue Eurobonds is forthcoming. The ESM would have to be restructured to issue outside of an agreed assistance program, the ESM’s board, made up of finance ministers, would need some adjustment as there would seem to be a conflict of interest.
The electorate is pushing back on Ever Closer and I can’t name on EU politician with any political capital to spend on the notion.
But maybe there is an institution that can rally the folks. The ECB has been the original creative thinking in the EU during crises and maybe even during the current calm they could bring some progress on Eurobonds. Seriously, Draghi can do anything. Unfortunately, time is running out and the next iteration of the ECB might now be so adventurous.
