No euro zone bond soon but "lite" option may work - Reuters poll

LONDON Thu Jun 21, 2012 4:50pm BST

LONDON (Reuters) - Euro zone leaders are unlikely to agree to common euro zone bonds that mutualise debt across the region any time soon, but they might agree to half-measures along those lines, a Reuters poll suggested on Thursday.

Eleven out of 18 analysts covering the bond markets who answered an extra question in the monthly Reuters bond yields and money markets poll said they did not expect an agreement on the issuance of common euro zone bonds.

But many said they expected something short of that, given Germany's opposition to the issuance of more debt to solve the currency union's debt crisis, which has pushed Spanish and Italian government borrowing costs to alarming levels recently.

The euro zone's consistently muddled response to the crisis has left world leaders exasperated, but on Tuesday they backed a slow-moving overhaul of the currency union, albeit with little word on jointly issued sovereign debt as a concrete proposal.

"We expect no agreement on a debt instrument that truly deserves the name euro bond," said Marius Daheim, senior fixed-income strategist at Bayerische Landesbank.

"In other words, one which replaces all national debt instruments by new instruments with uniform characteristics - issuer name, rating, liability - and which would create a unified European bond market with liquidity comparable to that of the U.S. Treasury market."

Winning German approval would be key to the success of any mutualised euro zone debt, but there has been little sign of this despite support from the executive European Commission, France, Italy and Spain.

UNDER PRESSURE

For Italy and Spain the question of debt issuance has been particularly pressing, as they have both suffered a sharp rise in government borrowing costs recently.

Spain, which last week accepted a bailout for its banking system worth up to 100 billion euros, saw its 10-year government bond yield spike past 7 percent this week, a level analysts say cannot be sustained for long without seeking outside help.

While on Thursday it fell towards 6.5 percent, the poll suggested these yield levels are not likely to recede over the next 12 months, hovering uncomfortably near 7 percent.

Equally, analysts cut their outlook for U.S., German and British government bond yields again to their lowest levels since this poll series first began in 2002.

That suggests there will be scant easing of market pressure on politicians to come up with bold action to fight the crisis.

Aides to French President Francois Hollande said he would settle for a pilot scheme of short-term "euro T-bills" for the time being, and analysts in the poll agreed there could be other ways to assuage German fears.

"The first issuances could be project bonds or short-dated papers," said Rene Defossez, a bond strategist at Natixis.

"The issuance of euro bonds would start much later, notably because Germany does not want to use euro bonds as a means to fix the problems of the euro zone."

He added that this stance leaves room for progress on euro bonds, since the launch of a euro zone sovereign bond would address more the problem of liquidity across fractured national debt markets than the institutional problems of monetary union.

Of the few respondents who thought there would be a fully fledged euro zone sovereign bond at some point, most said it would happen from 2013 onwards.

For full data from the bond yields poll, see