The implementation of Eurobonds could cause an enormous crisis that may result with the collapse of the entire euro area in the long run. The considerable sums have been mobilized in 2010 to avoid debt restructuring in Greece, Portugal and Ireland because they have been proven insufficient.
During the last month, Spain and Italy saw their markets demand waged higher to six percent, which has limited compatibility with a decrease in future debt.
If the intention was to escape from this disorder, the mechanisms of European Financial Stability Fund were not sufficient. The intervention of the European Central Bank has turned aside a crisis, but there must be found a permanent solution.
According to the mainstream opinion, the issuance of Eurobonds would be such a solution. These bonds would be issued by a central institution and the proceeds would be allocated to countries in the area, as for the appearance of their financing needs. The repayment of these instruments is jointly guaranteed by all countries of the Eurozone.
This is leaving aside the political and legal problems raised by the creation of an organization empowered to issue Eurobonds for those that do not discuss financial aspects. Their general advantage is clear and is related to the fact that all maturities in all countries of the Eurozone would be placed without the need of special funds that are traded under the pressure of the markets.
There are two major shortages of Eurobonds. The first is that a single interest rate will be higher than that of countries, such as Germany, are now paying. The question is whether therefore would it be necessary that countries would be punished by the Eurobonds to be agreed in the name of solidarity or as a cost of resolution of sovereign debt crisis.
The second one is that the governments of countries whose debt is excessive, given that in any case, no matter what they borrow at the rate of Eurobonds, will not be motivating to those who should implement the measures necessary to restore their unmanageable finances.
Unfortunately, this disadvantage brings the risk for the euro. While the indebtedness of some countries continues to grow and since the Eurobonds would not help decreasing it, the time will come to recognize their inability to repay what they owe. Greece, with other Eurozone countries, is trying to lend money from the IMF for more than a year in order to achieve sustainable levels, but it witnesses unpaid return to growth and sees its budget deficit down.
This is not something that we see now. According to the latest forecasts, the economy will continue to weaken not only this year, but also in 2012 for the fourth consecutive year, while the debt would continue to rise. Sooner or later, officials in Athens will be forced to restructure Greek debt.
In this situation of continued declining, if the Greek debt consisted of Eurobonds, creditworthy countries could continue to fund a Greek debt. If we really put things this way, some other countries could alse become unable to reduce their debts, so those with healthier finances could be forced to prevent a trouble that will be be more visible over time.
Until a default of all Eurobonds would limit it heavily, in Germany and other countries it would come to be called insolvent. It therefore appears that many Eurobond prevent the reappearance of crises refinancing on situation ultimately, all the countries of the Eurozone would be successful in decreasing their debt. As this scenario seems unlikely, their implementation would cause a big crisis that could result in causing the collapse of the entire euro area. Slowly.