tailieunhanh - Common Euro Bonds: Necessary, Wise or to be Avoided?

The alternative approach, that has only been discussed by market participants, is for a Russian or Argentine solution in which the debt-holders are made a take-it-or-leave-it offer to exchange outstanding debt for new, generally illiquid bonds at an arbitrary price that discourages future investment by the market. Such an approach is understood by the sovereign debt market to constitute a de facto default. Such a default would likely have serious adverse consequences for the Euro and the EU, and may be less likely that a bailout of some kind. The great advantage of Trichet Bonds is that they avoid both bailouts and defaults | DOI s10272-009-0287-x FORUM Common Euro Bonds Necessary Wise or to be Avoided The sharp widening of yield spreads among EMU sovereign bonds in the course of the economic crisis and concerns that some EMU member countries would encounter difficulties in rolling their existing debt and funding new budget deficits have revived proposals for a common bond issuance by EMU countries. Could these be put into practice without creating a moral hazard issue and conflicts with the no-bail-out clause of the Maastricht Treaty Would the establishment of a European Monetary Fund offer better prospects of overcoming the present problems Paul De Grauwe and Wim Moesen Gains for All A Proposal for a Common Euro Bond Until the eruption of the credit crisis in August 2007 financial markets were gripped by a flight to risk . The perception was that risks were very low. This perception was fed by the rating agencies which liberally distributed top ratings to dubious assets. Dulled by this low risk perception investors and financial institutions accumulated vast amounts of risky assets in their balance sheets. Today the markets have moved to the other extreme and perceive risks everywhere. They are now gripped by a flight to safety . This has profound implications for the workings of the government bond markets in the eurozone. Dramatic Increase in Spreads Spreads of sovereign debt within the eurozone have increased dramatically during the last few months. Figure 1 shows the evidence. The governments of Greece and Ireland now in February 2009 pay an interest rate on their debt that exceeds the German government bond rate by more than 250 basis points while the governments of Portugal Italy Spain Austria and Belgium have to pay more than 100 basis points extra. Thus sovereign bonds with the same maturity but issued by different national governments are now perceived as imperfect substitutes. Since all these bonds are expressed in the same currency the euro these spreads reflect .