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Eurobonds should be long-term, 'even permanent', solution

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  • Eurobonds should be long-term, 'even permanent', solution

EUROPE - The creation of Eurobonds could help stabilise European markets, but only if they are viewed as a long-term - and even a permanent - solution, according to the International Capital Market Association (ICMA).

René Karsenti, president at the ICMA, said the issuance of Eurobonds - or "stability bonds", as he preferred to call them - would "create a deeper market, enhance the position of the euro as international reserve currency and provide access to cheaper finance, as these assets will be viewed as close as possible to risk-free assets".

Speaking at the meeting of the European Bond Commission (EBC) in Frankfurt, Karsenti said the bonds should not be used as "crisis instruments", but rather as part of a permanent framework, which would serve as a "clear commitment" to fiscal convergence.

"Otherwise," he said, "it won't work."

Chris Golden, chairman at the EBC, said a recent proposal put forward by ELEC - a network of European entrepreneurs established in 1946 - was "very attractive".

The ELEC proposal is to pool short-term debt from all European member states (except those receiving assistance) into a fund. After four years, the fund would either be closed or replaced by a new vehicle.

The EBC chairman suggested that introducing the ELEC proposal through the "short end" of the market would be "an excellent way to test the waters at a relatively low cost".

Karsenti, who contributed to ELEC's proposal, said the fund could also be used to refinance member states' longer-term debt. 

"The moral-hazard aspect would also be taken into account, and, to avoid it, we suggested surcharges for countries with excess debt, which would be used as a first-loss buffer," he said.

Also speaking at the EBC meeting, Thomas Meißner, head of fixed income market research at Germany's DZ Bank, said it was not the European Central Bank (ECB) that would allay bond markets.

"The ECB is not providing liquidity through its SMP [Securities Markets Programme]," he said. "Instead, it is buying up the last pieces you see in the market, which leads to even less liquidity afterwards."

He said the ECB should focus not bond markets, but rather credit default swaps (CDS), and that the bank should offer to sell CDS at "whatever volume investors demand", adding: "I am sure the market will come down within seconds."

John Nugée, senior managing director at State Street Global Advisors, said the ECB's three-year loan programme had helped to "cut through the Gordian knot" by effectively providing quantitative easing.

He also predicted that 2012 would be the "year of decisions", and that Germany would have to drop its plan for "austerity for all", as the crisis had hit various countries for various reasons.

Con Keating, head of research at Brighton Rock, agreed that too many of the demands for austerity had been "blunt instruments" and were not "hitting what they should be hitting".

He added that Greece, instead of printing money, could monetise its debt simply by accepting bills and bonds in payment of taxes, which could "incentivise people to pay tax if debt is trading at a discount".

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