Will Eurobonding Save the Day (and Face)?
The new buzz word out of Europe is "restructuring." I suppose it's better than saying "failing." But, could this linguistic stitch in time be the perfect time to bring on the Eurobond?
Yes, says Michele Wucker, President of The World Policy Institute.
"It's a face-saving tool. This is the right time to do it before the price gets too high and the perception of restructuring is too negative," Wucker says.
Proponents of eurobonds say it will lower borrowing costs and provide an alternative reserve currency.
"Europe needs to harmonize fiscal policies and pool debt into a liquid eurobond. The sooner it happens, the less it will cost, 2013 is too late," Wucker says. "It also offers a way to reprofile European debt in a way that would allow the ECB to save face, by creating a totally new type of bond instead of simply restructuring troubled debt."
"While I wouldn’t call it the 'savior of Europe,' one of the big problems with the current system is the quasi-guarantee of one member country’s bonds by other countries. Creating a Eurobond and then assigning that debt proportionally to member countries would create an explicitly guaranteed bond," Guy LeBas, Chief Fixed Income Strategist at Janney Montgomery Scott, says, noting that if member countries wanted to issue debt over the Eurobond limit, they could do so.
Skeptics, however, believe it would only be a temporary shot in a very diseased arm.
"A EUR bond will be a nice, short term, aspirin for what is a compound fracture or a real heart attack in the EUR system. It may offer some help to ease the pain for a day or two but nothing more," Dennis Gartman told me.
Some in the hedge fund community don't advocate eurobonding as medicine, now or ever.
A Eurobond option for Greece just means "setting a precedent for the Greeks to implode Argentina style—the market will go illiquid/dark until the mess is cleaned up," Keith McCullough, CEO of Hedgeye Risk Management, cautions.
In terms of long-term policy, the perception of harmony may be achieved with movement in a Eurobond, but in practice, the perceived stitch could actually be an irreparable snag.
"It's way, way too late; the cracks are now fully fledged fissures in the structure of the EUR," Gartman says.
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