Would You Buy a Eurobond? 'Not the Be-All End-All'
CNBC.com Senior Writer
Eurobonds may be hailed by some as a potential solution to the Greek debt crisis, but likely would be met by skepticism in the open market.
Issuing Eurobondsbacked by the 17 euro-zone member nations would be aimed at lower rates to decrease borrowing costs for troubled nations such as Greece, Portugal and Spain.
But the mechanics of the bonds — specifically, their duration, how they would be guaranteed and the difficulty in issuing them while not violating euro zone membership requirements — could make them a tough sell to fixed income investors.
"There appears to be a high regard by market participants about eurobonds as a solution. The real question for me is, are they?" says Kevin Ferry, co-founder of Cronus Futures Management in Chicago. "Even though I do think there will be a near-term euphoric reaction to their issuance, I'm not so sure that they're the be-all end-all that the market intends them to be."
Because of its massive debt problem, Greece is on the cusp of leaving the euro zoneso it can devalue its currency and thus cheapen its debt.
Economists worry, though, that a messy Greek debt default— the country owes nearly half a trillion dollars — will reverberate not only across Europe but also could cause a global economic slowdown. Once Greece leaves, that could encourage other debt-laden nations to follow suit.
As such, Europe's leaders are groping for solutions, with the most recent being issuing bonds that would help Greece out of its predicament. Germany, though, objects due in large part from internal political pressure against bailing out fiscally irresponsible nations.
"From the German point of view, they've moved away from saying Eurobonds will never happen," Sarah Hewin, head of research for Europe at Standard Chartered Bank, told CNBC Europe. "The position is that they could happen at some point in the future. But first of all there needs to be much closer fiscal integration. So Eurobonds in their view is not going to be the solution for the current crisis."
In the interim, European Union leaders, at a dinner in Brussels, are expected to approve so-called project bondsaimed at infrastructure projects. The move is seen as a compromise as officials debate the wisdom of Eurobonds.
"It’s likely we get some sort of incremental step toward mutualization of debt via cosponsored bonds in the near future," said Scott A. Maher, managing director and head of global portfolio management at Pimco, the Newport Beach, Calif. firm that runs the largest bond fund in the world. Maher, in an email response, said he considers large-scale issuance "unlikely."
"Key is whether they would be 'joint and several' (the strong form) or whether they would limit liability of each government to a certain percentage of losses (as EFSF bonds do now for instance)," he said. "Even if this were the case, and even if issuance size might be small, market would react very favorably to a move in this direction."
While he thinks there is a good chance at issuing the euro bonds, Ferry doubts whether it is a long-term solution.
"What you have now is something that already exists in a certain way," he says. "Right now, the problem is the plumbing — what would flow through it. What you have with talk of a divorce and talk of a drachma is a focus on what's going to flow through."
The natural focus of the bond would be a low yield to keep borrowing cheap. But Ferry and other say the offering would have to provide at least some yield incentive to pull people away from the global debts of choice — specifically the U.S. Treasuryand the German bund, both of which are yielding at or near historic lows.
There also would need to be some assurance that Eurobonds would be more than just a stop-gap measure.
"Obviously it's a solution, but I still don't think it addresses the more fundamental problems of fiscal coordination," says Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco. "It's just another Band-Aid at this point."
Rupert did not comment directly on whether her firm would buy the Eurobonds, but said debt problems around the world have investors in government issuance justifiably scared.
"There really aren't good solutions," she said. "Somebody or probably a lot of somebodys are going to get hurt. We need to stop spending. We just can't continue to float our way out of these problems."