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Stability bonds could lessen euro-zone debt crisis – CFA Institute poll

EUROPE - Stability bonds could help alleviate the euro-zone sovereign debt crisis - but only as part of a package of structural reforms, fiscal integration and a strong common governance framework, according to a poll by the CFA Institute, the global association for investment professionals.

The survey of CFA Institute members  - undertaken within the context of the European Commission’s consultation on the issuance of stability bonds as a solution to the debt crisis - generated the following key results:
 
• The majority of respondents agree the common issuance of stability bonds among euro-area member states would alleviate the sovereign debt crisis (55%), reinforce financial stability in the euro area (52%) and facilitate the transmission of euro-area monetary policy (56%).

• Joint and several guarantees would be the most effective approach for the common issuance of stability bonds among member states of the euro area, according to 64% of members.

• More than 60% of members supported a partial substitution of stability bond issuance for national issuance, in which a portion of government financing needs would be covered by stability bonds, with the rest covered by national sovereign bonds.

Agnès Le Thiec, director of capital markets policy at CFA Institute, said: “A majority of our members believe the common issuance of stability bonds could help solve the debt crisis in the euro-zone.

“However, new financial instruments will not cure the structural problems of imbalances in trade and competitiveness or public debt in many member states.

“Stability bonds also carry a high risk of moral hazard and would therefore have to be associated with much more extensive structural reforms, fiscal integration and a strong common governance network.”
 
The risk of moral hazard, where some member states may follow poor budgetary discipline with limited implications for their financing costs, is a key concern of CFA Institute members.

Consequently, they view the following as necessary preconditions for participating member states:

 • Significant enhancement of economic, financial and political integration - which is supported by 86%.

• Increased surveillance and intrusiveness in the design and implementation of national fiscal policies, which is endorsed by 88%.

• Limited access to the stability bonds in cases of non-compliance with a euro-area governance framework. This is supported by 90%.

The poll, which generated feedback from 798 members in the EU and Switzerland, was conducted to inform the CFA Institute’s response to the European Commission’s Green Paper on the feasibility of introducing stability bonds and to provide feedback on the concerns of professional investors.

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