ECB’s Bini Smaghi proposes single eurozone bond issuing agency

bini-smaghi

Lorenzo Bini Smaghi, an executive board member at the European Central Bank (ECB), on Friday proposed the establishment of a supranational entity in the euro area to issue government bonds with budget plans subject to approval by member states.

At an event in Lucca, Italy, Bini Smaghi said the best way to prevent euro countries from defaulting was to lay down rules that placed a constitutional weight on acceptable debt levels. He said one way to ensure such rules were binding was to empower "a supranational entity in the euro area to issue government bonds for the member states". "The countries would in fact no longer have the capacity, technically or politically, to issue public debt on the market," Bini Smaghi said.

Bini Smaghi said the supranational agency would also serve as a first step towards achieving a single European bond. He said such a bond would finance public budgets of all countries, or those that share similar characteristics, such as the highest rating. Bini Smaghi said the European Council of Ministers, if permitted, should decide how much debt can be issued by the agency as a whole and how to distribute it to individual states. He said this would not require an integration of budgetary policies, but by controlling the volume of emissions, the Council would have the power to decide the budgetary balance of individual countries. "What is in common is just the tap – an integrated system of securities for issuing on the market the proceeds from which are then allocated to individual countries, according to joint decision-making mechanisms," Bini Smaghi said.

Although a premature step in the euro area's integration policy at first glance, Bini Smaghi said in reality the current procedures already envisage the Council approving the budgets of individual countries, as part of the stability programmes presented each year by them. However, unlike the procedures envisaged by the ECB, the opinion of the Council on whether to issue debt securities, which is currently not binding, would indeed be so. Bini Smaghi said a key issue would be the decision-making mechanism with which the Council would approve the total volume of securities issued and that of individual states. "It is therefore necessary to maintain the overall discipline of the system and avoid having to keep pace with financing larger public deficits. On the other hand, countries should have a strong incentive to limit the indebtedness of others to avoid becoming contaminated," Bini Smaghi said.

In December, Jean-Claude Juncker, the prime minister of Luxembourg and chairman of the Eurogroup, floated the idea of creating a common euro debt instrument as a way of deterring market speculation against the single currency area. In an opinion piece in the Financial Times, a newspaper, co-authored by Juncker and Giulio Tremonti, Italy's finance minister, said European sovereign bonds, or e-bonds, issued by a European Debt Agency as successor to the current European Financial Stability Facility, would assist member states in difficulty, without leading to moral hazard. Michael Krautzberger, the co-head of European fixed income at BlackRock, told Credit Magazine in February that the eurozone could benefit as a whole from the introduction or limited introduction – against strict fiscal conditions and only up to some hard ceiling – of a common eurozone bond. France and Germany have strongly opposed the idea.

 

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