Tuesday, May 29, 2012

Eurobonds: il conto, la cuenta, l'addition, die Rechnung

May 29, 2012

One plan to resolve the euro zone debt crisis is for the common issue of eurobonds - each country's debt would be guaranteed by all the others. The rationale is that the overall level of European debt is not that high, when compared with the US; it is just distributed in an awkward way.

David Owen of Jefferies has come up with a ready reckoner, by assuming that euro zone debt would trade at the weighted average (based on issuance) of current yields (excluding Greece). Thus the cost of annual issuance for Germany would rise from the current 1.4% to 3.7%, while yields in Italy, Spain etc would fall. The result would be an annual cost for Germany of €49 billion, or around 1.9% of GDP. France would pay an extra €16 billion, or 0.8% of GDP. the Netherlands, Austria and Finland would all face costs of around 1% of GDP. That may not seem too bad a deal, given the predictions of the pain caused by a Greek exit, although it is worth pointing out it is an annual cost, not a one-off.

The biggest savings would accrue to Portugal and Cyprus, which would save 8.7% and 8.1% of GDP respectively. Ireland's borrowing costs would fall by 3.6% of GDP. Italy would save €37 billion, or 2.4% of GDP and Spain €18 billion, or 1.7%. Such a deal would knock a significant lump off their annual budget deficits.


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