The term “Eurobond” is usually taken to mean a bond which has a “joint and several” guarantee by all member states of the Eurozone (see for instance Manasse 2010 and Suarez 2011). The “joint and several” guarantee implies that if the issuing country cannot service its “Eurobond” debt the creditors can demand payment from all other Eurozone countries. This would imply that in extremis the creditors could demand that Finland or Estonia pay up for the (Eurobond) debt run up by, say, Greece or Italy if the other large Eurozone members are either unwilling or unable to pay.

This contribution deals only with the idea that member states should be able to issue Eurobonds to finance their deficits and convert at least part of their outstanding debt. This is, of course, a totally different proposition from the idea that a common institution should be able to finance some task of common interest (see Gros and Micossi 2008).

Will investors buy Eurobonds?

Proponents of Eurobonds assert that they could be sold at a very low yield, close to that of the benchmark German “Bunds”. The thinking is that because the aggregate debt and deficit levels of the Eurozone compare favourably with those of the US, investors would lend at similar interest rates.

But this is a proposition that has not been (and unfortunately cannot be) tested and is not a foregone conclusion, especially if the Eurobonds are to cover a large part of the debt outstanding.

• Investors have noted that many arrangements to deal with the Eurozone debt crisis have been overturned by politicians and thus might not fully trust the “joint and several” guarantee.

They might also have a different opinion of the incentive effects which would result from Eurobonds.

• Market participants might expect that the introduction of Eurobonds will lead to a faster aggregate increase in debt.
• Investors might also just have a different view of sovereign credit risks in the Eurozone given its much higher level of bank debt (2.5 % of GDP compared to “only” 1.2% in the US).

It is interesting to note that opponents of Eurobonds tend to much more pessimistic regarding the interest rate they would carry. For example, Ifo (2011), assumes that the interest rate on Eurobonds would be equal to the (weighted) average of the yield on outstanding government debt in the Eurozone, which at present is almost 200 basis points higher than the yield on German government debt.

Another argument turns on the liquidity that such bonds would have. Of course, Eurobonds would become a highly liquid asset with a volume of available debt comparable to US Treasury bonds. However, the yield differentials between large and small AAA-rated issuers within the Eurozone (eg Germany versus Austria) are in the order of 30-50 basis points. The improvement in liquidity would thus at most constitute a minor benefit.

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