Eurozone officials call for pan-European bonds

[December 06, 2010]  BRUSSELS (AP) -- The creation of new pan-European bonds would boost much-needed confidence in the euro, two top European officials said Monday, as finance ministers gathered in Brussels to find ways to fight the debt crisis.

The head of the group of 16 countries that use the euro, Jean-Claude Juncker, and Italian Finance Minister Giulio Tremonti said the European Union should issue its own bonds to help countries that run into financial trouble.

In an editorial in the Financial Times, Juncker and Tremonti wrote that pan-European bonds could stabilize government debt markets once the euro750 billion ($1 trillion) bailout fund runs out in 2013.

Eurozone finance ministers will likely debate the idea on Monday as they also consider increasing the size of the bailout fund and flesh out a so-called European Stability Mechanism -- new rules for bailouts that are meant to force losses on private investors in some cases.

Juncker and Tremonti say a European Debt Agency could eventually issue bonds worth up to 40 percent of EU economic output.

However, the proposal is set to face opposition from Germany, Europe's largest economy, which has ruled out European bonds amid fears they would push up its borrowing costs.

Investors fear that the debt load in fiscally weak countries, particularly Portugal but also Spain and Italy, could require more rescue efforts. The search is on for ways to convince markets that the region will be able to lower its debts and sustain growth.

One solution might be to restructure those countries' debts now and allow them to get their economies in order under humane circumstances, said Simon Tilford, chief economist at the Centre for European Reform, a London-based thing tank.

Such a simultaneous shock-and-awe move, Tilford said, might stop contagion and take pressure of Italy and Spain.

"By going halfway, you're making everything worse," said Tilford.

To avoid defaults altogether, another option would be to flood a new emergency loan fund with cash to stabilize the eurozone with brute financial muscle.

Mere government guarantees like the ones that hold up the current bailout fund wouldn't be enough, said Gilles Moec, an analyst at Deutsche Bank in London. "It will be about creating a regular flow of permanent funding to this facility."

Money could come from a pan-European tax or special bonds issued for the entire eurozone, experts say. But such a step toward fiscal union is set to face firm opposition from the bloc's richer members, particularly Germany, which frown at regularly transferring funds to weaker nations.

Others see an even stronger role for the new facility.

"It should be able to do just about anything, including buying up government bonds," said Stefano Micossi, director general of Italian business association and think tank Assonime. The new mechanism should get unlimited access to central bank credit to stabilize bond prices, said Micossi. "One trillion, 2 trillion, you name it."

At some point, experts warn, a support system for the eurozone's weaker members might even be necessary, since the low borrowing costs they enjoyed in the healthy days of the currency union are likely gone forever.

[Associated Press; By GABRIELE STEINHAUSER]

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