November 27, 2011 / 11:09 PM / in 9 years

Think-tank proposes short-term euro zone bond fix

BRUSSELS (Reuters) - Euro zone states should pool their short-term borrowing via a joint fund to enable countries pursuing EU-approved policies, but unable to borrow at normal rates, to access affordable funding, a European think-tank panel proposed on Monday.

A group of bankers, economists and market experts from the European League for Economic Cooperation suggested an EMU Bond Fund as a bridging solution to the euro zone’s sovereign debt crisis, aimed at restoring market confidence.

“Our modest proposal is designed to provide a limited degree of mutual support that will be sufficient to allow adequate time to states that are themselves trying to restore their competitiveness,” the authors wrote.

“If the euro zone demonstrates that it is on track to meet these initial economic (and political) goals of renewed competitiveness and sound public finance, then its individual members will have a compelling story to tell the investors of the world.”

The fund, which would last only four years, would complement moves to instil stricter fiscal discipline and economic reform in the European Union. It would be open to all euro area states whose policies had been approved by the European authorities.

EU paymaster Germany has so far rejected all proposals for joint bond issuance, arguing that it would remove the market incentive on governments to implement painful austerity measures and economic reforms.

Berlin, backed by the Dutch, Finns and Austrians, is also concerned that common euro zone bonds would increase its own cost of borrowing.

Chancellor Angela Merkel has said common bonds could only come at the end of a process of fiscal integration, but the proposal suggests an immediate solution to get over the crisis threatening the survival of the euro zone in its current form.

The proposed fund would borrow in the markets for at most a two-year term to match the borrowing profile of client states.

Its capacity would be large enough to finance for the next two years all the maturing bonds of euro area states that were unable to access capital markets on normal terms.

Italy, whose short-term borrowing rate hit 8 percent on Friday, a cost widely regarded as unsustainable, needs to refinance more than 300 billion euros in maturing debt next year alone.

The panel said borrowings would enjoy a guarantee involving all participating euro area states. The exact nature of the guarantee remains to be determined, subject to a market survey.

Countries that breached the EU’s budget deficit ceiling of 3 percent of gross domestic product would have to pay an interest rate surcharge. States subject to sustained sanctions under the EU’s Stability Pact rules would cease to be eligible to borrow from the fund.

“This scheme guarantees access to finance at ‘reasonable’ cost for all member states, stabilizes the monetary union, shelters countries from strong swings in market sentiment and improves fiscal discipline in the eurozone,” the authors said.

“The announcement would be a huge political statement about commitment to resolve the problems of some euro area member states and deepen economic union substantially. It would be the ‘big bazooka’ that an outsider has called for,” they said.

The authors included economists Graham Bishop of Britain and Rene Smits of the Netherlands, Austrian central bank official Franz Nauschnigg, the head of the European Capital Markets Association, Rene Karsenti of France, and bankers Wim Boomstra and Shahin Kamalodin of Rabobank, Niels Gilbert of DNB and Nicolás Trillo Ezquerra of Spanish bank BBVA.

All participated in a private capacity.

Writing by Paul Taylor; Editing by David Holmes

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