Eurobond Being Mulled Again Amid Fears Over Greece

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Looks like it’s serious enough for this, thanks.

And anything done at the national level serves to weaken the group as a whole.

Eurobond Being Mulled Again Amid Fears Over Greece>

2009-12-15 15:40:15.949 GMT

PARIS (MNI) – Eurozone leaders, reacting to worries about the situation in Greece and its potential fallout are looking at the option of a special fund to provide emergency aid, a well-placed monetary source told Market News International.

The source, who is familiar with the ongoing discussions, said that if a eurobond proposal ended up being nixed, “there is also the option of a solidarity rescue fund to which all eurozone countries can contribute.”

It’s not quite clear how the EU or eurozone would get around the so-called “no-bailout clause,” but there is a sentiment among many EU leaders that the clause has lost credibility because the political and economic costs of letting a member state fail would be too high.

The no-bailout clause, in article 103 of the EU Treaty, says that neither the EU, the ECB nor any national government “shall…be liable for or assume the commitments” of a member state.

A eurobond, depending on how it was structured, could be a hard sell in this regard. However, some sort of fund that loaned to a country – but did not take on any burden associated with its debt – might just pass muster.

It’s unclear what such a fund might look like, since one has never been attempted. But one option might be for large EU countries or the EU to create a special facility through which it borrowed money in the bond market to help the member in trouble.

Such an arrangement might be similar to the bonds that the European Commission has already issued for the emergency facility from which Hungary and Latvia have been borrowing. Under current rules, these particular EU Commission bonds can’t be used to help eurozone members.

Some observers have warned that any arrangement smacking of a bailout – whether a eurobond or “solidarity fund” — could potentially be regarded as unfair by countries such as Ireland, which has already announced stiff spending cuts to try and put its fiscal house back in order.

However, proponents of doing something would argue that Ireland is not yet out of the woods and could be submerged again in the market undertow should the situation in Greece lead to a more generalized selloff of peripheral EMU sovereign debt.

So far, other peripherals have been largely spared in the recent tumult surrounding Greece, which is by far the worst performing among sovereign eurozone issuers.

The spread on Greek bonds widened Tuesday by 24 basis points to 253 points above the benchmark German Bund, on market disappointment over a paucity of budget balancing details contained in the speech Monday night by Greece’s Prime Minister George Papandreou.

By contrast, Ireland’s sovereign paper was unchanged at a spread of 165 points above Bunds; Spain widened just 1 point to a spread of 62 basis points; Portugal widened 2 points to 67 bps above Bunds.

Papandreou pledged to bring Greece’s deficit back to within the Maastricht limit of 3% of GDP within four years, but some of the other details were sketchy. On the revenue side – Greece’s government has promised a hefty 40% increase – Papandreou mentioned a new progressive tax on all sources of income, as well as the abolition of certain tax exemptions, a new capital gains tax and a stiff tax on bonuses. He also promised new revenue from a reinvigorated fight against tax evasion.

On spending, he pledged a freeze on public sector wages above E2,000 a month; a 10% cut in supplemental wages; a hiring freeze in most sectors for 2010; and a 10% cut in social security spending next year.

Reaction was lukewarm not only in markets but also at the European Commission, which in each of the past 5 years has registered dissatisfaction with spending and revenue estimates posited by Greece, calling them overly optimistic.

“It’s not just a question of words but also deeds,” the spokesperson for European Monetary and Economic Affairs Commissioner Joaquin Almunia said Tuesday, adding that the Commission wants to see “concrete measures” to get [Greece’s] budget deficit “moving downwards as soon as possible.”

Greece is expected to submit specific proposals to the Commission shortly after the New Year.

Meanwhile, the ECB is expected on Thursday to consider the possibility of further ratings downgrades on Greek debt.

“In the case of a further downgrade, we must be prepared, as it could have a domino effect on other eurozone countries,” the central banking source asserted. “That in turn would put pressure on the euro and the euro is a prime concern.”

The source also seemed to hint that Greek debt, if hit by additional downgrades, could have trouble staying on the list of eligible collateral at ECB refinancing operations after next year, when
the current acceptable minimum rating of BBB- will revert to the pre-crisis standard of A-.

“We will have to take under consideration what will happen after 2010, when the temporary and more lenient stance of the ECB will stop,” he said.

“I don’t say that Greece is heading towards losing its eligibility for collateral,” he continued. “However, we always plan and assess how a situation will evolve in the medium-term, and there is a risk that some countries might be facing much more expensive borrowing conditions in the next two years, because of market conditions.”

The official added that, in the case of Greece, “if borrowing becomes even more expensive, it will create problems in its efforts to combat high debt and deficit.”

But he waxed optimistic, nonetheless. “Despite the fact that rating agencies are downgrading Greece, we do not believe that there will be a borrowing problem,” he said.

“We believe that the Greek government will adopt all necessary measures to satisfy not only the markets but also its EU allies and the ECB and work towards fiscal consolidation within the next four years.”