№252. Partial sovereign bond insurance by the eurozone: A more efficient alternative to blue (Euro-) bonds
№252. Partial sovereign bond insurance by the eurozone: A more efficient alternative to blue (Euro-) bonds

Author(s): Hans-Joachim Dübel
Subject(s): Economic policy, Government/Political systems, International relations/trade, Financial Markets, Fiscal Politics / Budgeting
Published by: CEPS Centre for European Policy Studies
Keywords: Partial sovereign bond insurance; Eurozone; Euro-bonds; Eurozone Stability Mechanism;
Summary/Abstract: ‘Blue’ or Eurobonds guaranteed via joint and several liability by the eurozone member states have been proposed by Bruegel, the Brussels-based think tank, as a key tool to stabilise and structure the eurozone sovereign bond markets. However, as current events show, a second key feature of the proposal – their limitation in volume to 60% of GDP – will be untenable in times of financial crisis. It carries the risk of exploding marginal costs of funds to those sovereigns facing rapidly rising debt levels and forcing them to issue ‘red’ bonds on their own standing. Rapidly rising fund costs would quickly drive them out of the bond market and into the blue bond-issuing Eurozone Stability Mechanism (ESM). Therefore, under the current proposal, in practice all sovereign bonds issued in the eurozone, regardless of ex-ante GDP limits, would have to be assumed to be blue bonds – an outcome that is fraught with moral hazard.

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