GREEN PAPER on the feasibility of introducing Stability Bonds pdf

EUROPEAN COMMISSION

Brussels, 23.11.2011

COM(2011) 818 final

GREEN PAPER

on the feasibility of introducing Stability Bonds

EN 2 EN

GREEN PAPER

on the feasibility of introducing Stability Bonds

1. RATIONALE AND PRE-CONDITIONS FOR STABILITY BONDS1

1.1. Background

This Green Paper has the objective to launch a broad public consultation on the concept

of Stability Bonds, with all relevant stakeholders and interested parties, i.e. Member States,

financial market operators, financial market industry associations, academics, within the EU

and beyond, and the wider public as a basis for allowing the European Commission to identify

the appropriate way forward on this concept.

The document assesses the feasibility of common issuance of sovereign bonds (hereafter

"common issuance") among the Member States of the euro area and the

requiredconditions2

. Sovereign issuance in the euro area is currently conducted by Member

States on a decentralised basis, using various issuance procedures. The introduction of

commonly issued Stability Bonds would mean a pooling of sovereign issuance among the

Member States and the sharing of associated revenue flows and debt-servicing costs. This

would significantly alter the structure of the euro-area sovereign bond market, which is the

largest segment in the euro-area financial market as a whole (see Annex 1 for details of euro￾area sovereign bond markets).

The concept of common issuance was first discussed by Member States in the late 1990s,

when the Giovannini Group (which has advised the Commission on capital-market

developments related to the euro) published a report presenting a range of possible options for

co-ordinating the issuance of euro-area sovereign debt3

. In September 2008, interest in

common issuance was revived among market participants, when the European Primary

Dealers Association (EPDA) published a discussion paper "A Common European

Government Bond"4

. This paper confirmed that euro-area government bond markets remained

highly fragmented almost 10 years after the introduction of the euro and discussed the pros

and cons of common issuance. In 2009, the Commission services again discussed the issue of

common issuance in the EMU@10 report.

The intensification of the euro-area sovereign debt crisis has triggered a wider debate on

the feasibility of common issuance5

. A significant number of political figures, market

1 The public discussion and literature normally uses the term "Eurobonds". The Commission considers

that the main feature of such an instrument would be enhanced financial stability in the euro area.

Therefore, in line with President Barroso's State of the Union address on 28 September 2011, this Green

Paper refers to "Stability Bonds". 2 In principle, common issuance could also extend to non-euro area Member States but would imply

exchange rate risk. Several non-euro area Member States have already a large part of their obligations

denominated in euro, so this should not represent a significant obstacle. All EU Member States might

have an interest in joining the Stability Bond, especially if that would help reducing and securing their

funding costs and generates positive effects on the economy through the internal market. From the point

of view of the Stability Bond, the higher the number of Member States participates, the bigger are likely

to be the positive effects, notably stemming from larger liquidity. 3

Giovannini Group: Report on co-ordinated issuance of public debt in the euro area (11/2000).

http://ec.europa.eu/economy_finance/publications/giovannini/giovannini081100en.pdf. 4

See A European Primary Dealers Association Report Points to the Viability of a Common European

Government Bond, http://www.sifma.org/news/news.aspx?id=7436. 5

See Annex 2 for an overview of analytical contributions to the Stability Bonds debate.

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analysts and academics have promoted the idea of common issuance as a potentially powerful

instrument to address liquidity constraints in several euro-area Member States. Against this

background, the European Parliament requested the Commission to investigate the feasibility

of common issuance in the context of adopting the legislative package on euro-area economic

governance, underlining that the common issuance of Stability Bonds would also require a

further move towards a common economic and fiscal policy6

.

While common issuance has typically been regarded as a longer-term possibility, the

more recent debate has focused on potential near-term benefits as a way to alleviate

tension in the sovereign debt market. In this context, the introduction of Stability Bonds

would not come at the end of a process of economic and fiscal convergence, but would come

in parallel with further convergence and foster the establishment and implementation of the

necessary framework for such convergence. Such a parallel approach would require an

immediate and decisive advance in the process of economic, financial and political integration

within the euro area.

The Stability Bond would differ from existing jointly issued instruments. Stability Bonds

would be an instrument designed for the day-to-day financing of euro-area general

governments through common issuance. In this respect, they should be distinguished from

other jointly issued bonds in the European Union and euro area, such as issuance to finance

external assistance to Member States and third countries7

. Accordingly, the scale of Stability

Bond issuance would be much larger and more continuous than that involved in the existing

forms of national or joint issuance.

Issuance of Stability Bonds could be centralised in a single agency or remain

decentralised at the national level with tight co-ordination among the Member States.

The distribution of revenue flows and debt-servicing costs linked to Stability Bonds would

reflect the respective issuance shares of the Member States. Depending on the chosen

approach to issuing Stability Bonds, Member States could accept joint-and-several liability

for all or part of the associated debt-servicing costs, implying a corresponding pooling of

credit risk.

Many of the implications of Stability Bonds go well beyond the technical domain and

involve issues relating to national sovereignty and the process of economic and political

integration. These issues include reinforced economic policy coordination and governance,

6

European Parliament Resolution of 6 July 2011 on the financial, economic and social crisis:

recommendations concerning the measures and initiatives to be taken (2010/2242(INI)) states:

" …13. Calls on the Commission to carry out an investigation into a future system of Eurobonds, with a

view to determining the conditions under which such a system would be beneficial to all participating

Member States and to the euro area as a whole; points out that Eurobonds would offer a viable

alternative to the US dollar bond market, and that they could foster integration of the European

sovereign debt market, lower borrowing costs, increase liquidity, budgetary discipline and compliance

with the Stability and Growth Pact (SGP), promote coordinated structural reforms, and make capital

markets more stable, which will foster the idea of the euro as a global ‘safe haven’; recalls that the

common issuance of Eurobonds requires a further move towards a common economic and fiscal policy;

14. Stresses, therefore, that when Eurobonds are to be issued, their issuance should be limited to a debt

ratio of 60% of GDP under joint and several liability as senior sovereign debt, and should be linked to

incentives to reduce sovereign debt to that level; suggests that the overarching aim of Eurobonds

should be to reduce sovereign debt and to avoid moral hazard and prevent speculation against the

euro; notes that access to such Eurobonds would require agreement on, and implementation of,

measurable programmes of debt reduction;". 7

E.g. bonds issued by the Commission under the Balance of Payments Facility/EFSM and bonds issued

by the EFSF or issuance to finance large-scale infrastructure projects with a cross-country dimension

(e.g. project bonds to be possibly issued by the Commission). The various types of joint issuance and

other instruments similar to Stability Bonds are discussed in Annex 3.