Wrangling over eurobonds: The two sides take shape

For something that’s supposedly not going to happen, the issue of whether or not the Eurozone can and/or will issue joint and several eurobonds refuses to go away. Financial markets were greeted to an array of conflicting statements over the weekend as leading EZ politicians and officials pushed their agendas into the media. The sides are splitting into two increasingly distinct and opposing camps.

I spent a bit of time today looking into who’s said what both recently and over the past year on this issue, and have to say that the two sides are pretty evenly matched, with luminaries evenly distributed. Take a look at the table I produced of where the allegiances currently lie. It just so happens that each side has 11 players, so the opportunity to compare the two eurobond camps as soccer teams became too tempting to pass up. Football metaphors not being my forte, thanks go to my IFR colleague Nick Haydon for name checks and sporting insight.

The ‘against’ team is captained by the Lionel Messi of European politics, top striker Angela Merkel, the most vocal in opposition to the idea of having Germany in particular but the Northern EZ members more generally prop up the Southern members. Merkel plays ahead of supporting midfielders and behind-the-scenes playmakers Nicolas Sarkozy and Herman van Rompuy as Andres Iniesta and Xavi.

On the opposing team, those in favour or at least in favour of exploring the eurobond option include heavyweight Eurocrats Jose Manuel Barroso, Jean-Claude “you should never say never” Trichet and Oli Rehn playing as the formidable trio of Cristiano Ronaldo, Xabi Alonso and Cesc Fabregas.

All joking aside, the confused public policy response to this latest stage of the euro debt crisis is typical of the fractured and fractious response we’ve had to put up with to pretty much everything that’s emerged since the financial crisis of 2007-08. We are nowhere near the end-game and it looks to me like it’s going to be a long haul. European markets had a distinctly uncertain and tired tone today; Bunds fell in the European morning session on profit taking but buying on dips looks to be order of the day as the safe-haven status of German government debt continues unabated.

SMP data met with almost no reaction. The ECB made €14.29bn of bond purchases between August 10 and August 16, in line with expectations and much lower than the €22bn in the previous week. The impact of ECB purchases were far less marked, mind you: 10-year Italy and Spain bond yields had ratcheted in pretty sharply in the previous week (100bp-140bp), but only tightened by 18bp and 10bp respectively last week and are hovering below the 5% mark.

The lack of any drama at the ECB focused attention right back on the eurobond issue – and on Greece’s Bailout 2.0, which is looking ever more convoluted. This is not because of any collapse in support for private sector involvement, but because the collateral issue put into the mix by the Finnish government has now spread to the Netherlands, Austria and Slovakia, whose governments are now seeking equal terms. Bailout 2.0 still needs to get through parliamentary votes. The collateral issue is potentially just delaying the whole thing. But it could just put it in jeopardy.

The agreement with Finland will see Greece to deposit cash in a state account that Finland will invest in Triple A bonds. Interest on the invested cash will generate the required collateral, Finnish finance minister Jutta Urpilainen said. Comedy value came with Moody’s saying that this latest wrinkle could be negative for Greek credit ratings.

As for the eurobond, the naysayers are putting forward a number of arguments. One is the real issue of moral hazard. I think it’s fair enough that any plan will have to be prefaced by an agreed framework of conditionalities and deterrents. But I just don’t buy all that stuff about the eurobond requiring the Maastricht Treaty to be rewritten, requiring any number of legal changes to the nature of the Eurozone, that it will take many years before it can be ready. It looks to me like buying time.

My sense, on the back of talking to a range of market players, is that the Eurozone will over time – and not necessarily that much time – move closer to the concept and into the practicalities of a common eurobond. Angela Merkel is right in principle and in a world of open choices to say, as she did at the weekend, that politicians can’t and won’t bow to market pressure. But she can’t get away from the fact that politicians and financial markets are locked in a symbiosis that both would probably prefer to avoid. Like it or not, it’s a buyer’s market out there. I have a feeling that those with the money will ultimately hold sway.