LEX The euro-denominated sovereign bond market is a mess. Since the birth of the single currency investors have treated this €7,300bn behemoth as a homogenous, highly-rated entity. They merrily drove spreads down as if there were no material difference in the creditworthiness of Germany and Greece. Yet the underlying economies were diverging. The reversal of spreads in recent months looks like a belated acknowledgement that the punt on convergence was a mistake.
The eurozone is both a multi-tiered economy and a multi-tiered sovereign bond market. The challenge is to reduce the impact of diverging creditworthiness among its 16 sovereign issuers on borrowing costs. Bruegel, a Brussels think tank, suggests an answer. It argues that the 16 should pool their national debt up to 60 per cent of gross domestic product, creating a core market of “blue” bonds that would attract a triple-A rating because of its size and liquidity, and by making all members liable for each other’s debt. Borrowing beyond the 60 per cent threshold would be on a national basis.
This structure would incentivise issuers to keep borrowing to within 60 per cent of GDP by ensuring the best terms up to that level, helped by the market’s size and liquidity. That should make the market more attractive to big sovereign bond investors, and could help reverse a worrying flight from euro-denominated sovereign issues over the past few months. But there is no mechanism for creating this type of market structure, and it would require an independent Stability Council to propose annual allocations. Imagine the bureaucratic wrangling over that.
The European Central Bank’s seemingly open-ended role as buyer of last resort of eurozone government debt illustrates the market’s structural problems. The blue bond proposal may not address all of them, but it asks some smart questions.
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