Guardian
May 24, 2012
1. The issue at a glance
Borrowing costs are rising for many of the single currency's 17-members. Italy, Spain, Portugal and Ireland are among those that must pay sky high interest rates on their debts. But what if France and Germany helped out? What if the biggest economies on the continent agreed to issue euro loans on behalf of all countries in the currency club? A euro loan, or bond, could be issued by one country, but would be underwritten by all of them. Germany would pay more for its debts and Greece would pay less.
2. Why is it being talked about now?
A bond is another word for a mortgage. Nations borrow money for all kinds of purposes for three months, three years or 10 years and all points in between. The 10-year bond is considered the benchmark. Western nations will have thousands of bonds in circulation, most of which are traded on a secondary market by investors. These investors will buy a bond when it is issued and then decide to sell it before the maturity date. A £2m bond that pays 4% each year for 10 years, may sell for £1.95m if the country that issued the bond looks a little dodgy. If there is a possibility of default the bond might become worthless.
The Greek crisis has spread fears that Spain and Italy could struggle to sell their bonds without support from Brussels. Spain, in particular, which is close to spending more than €100bn (£89bn) rescuing its banks, could be shunned by private sector lenders and run out of money without support from the mothership. Brussels does not have enough in the kitty to keep Spain and Italy afloat. The German government and central bank, the Bundesbank, are vehemently against the idea. They don't want to pay higher interest rates. More importantly, German chancellor Angela Merkel says EU treaties forbid joint debt liabilities. The German constitution would also need to be amended say others. And the Bundesbank said recently that even if these problems could be overcome, it will be the Germans left on the hook for all Europe's debts if something goes terribly wrong and several countries go bust. Worse, international lenders could view new eurobonds as a disguise for an already debt-laden eurozone and charge punitive rates of interest.
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