Paul Lachine

Eurobonds without Fear

The debate about whether and how to introduce Eurobonds has focused on the appropriate limits on issuance. But the right question is not what to do when debt gets near its limit, however high or low; it is how to prevent debt from getting near that limit in the first place.

SANTIAGO – The day of the Eurobond may be near. What was once a quack’s idea for resolving Europe’s financial crisis is now the only reliable way to save the euro. Having their bonds purchased by the European Central Bank did not keep Greece, Ireland, and Portugal from needing a bailout. It will not save Spain and Italy, either.

But Spain and Italy are too large to be bailed out. The new European Financial Stability Facility (EFSF) is not up to the task. And enlarging the EFSF to an appropriate size would require massive additional French borrowing, which could well place France itself at the receiving end of a speculative attack.

This is where Eurobonds come in. The five countries in trouble will need to place tens of billions of euros in new debt and roll over even larger amounts of old debt. Markets long ago stopped buying bonds issued by Greece, Ireland, and Portugal, and might soon stop buying paper issued by Italy and Spain – or do so only at prohibitive interest rates. But markets would happily gorge on bonds backed by the full faith and credit of the eurozone.

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