Les arguments pour un eurobond commun (document en anglais)

4. THE ARGUMENTS FOR A COMMON EUROBOND

4.1. The efficiency gains from further integration; greater liquidity

and lower borrowing costs

The main argument for a common European government bond is that it would promote

further market integration, especially on the supply side, and greater debt management

coordination. The efficiency gains from a unified bond market could be substantial: liquidity

could be enhanced by larger outstanding volumes and the more so if the common

Eurobond would become eligible for delivery into a futures contract. Greater liquidity would,

in turn, reduce liquidity premia and, thus, the costs of borrowing for Member States, with

greatest advantage for smaller and medium sized issuers. Finally, to the extent that

issuance of national bonds would come to an end, some Member States with smaller

funding needs would save the costs of maintaining their national primary markets and

dealer systems.

These benefits could be obtained, in various degrees, with all the three types of debt

instruments considered, to the extent that: issues were sufficiently large and regular; the

outstanding volumes of the Eurobond reached sufficiently high levels and; its market

replaced the national markets of, at least, the Member States with smaller funding needs.

The evidence in section 2 suggests that the argument has some merit and mostly appeals

to small issuers with high credit standings, such as Finland and The Netherlands, but also

to a benchmark issuer like France, which all appear to have borne a high cost from

illiquidity since the start of EMU.9 Interestingly, this cost increased over the course of the

US financial crisis by up to 30 basis points, either because of greater interest-rate volatility

or a portfolio shift toward German Bunds. In fact, liquidity premia for these countries seem

to respond to the surge in measures of risk, thereby displaying a positive correlation with

credit risk premia. Indeed, the higher interest-rate volatility, associated with a perceived

higher risk, could increase the cost of illiquidity; i.e. of having to trade in a thin market at

an uncertain price. Moreover, a portfolio shift by international investors towards safety and

liquidity, i.e. a flight to quality, may affect both the credit risk premium and the liquidity

premium.

4.2. A “safe-haven” alternative to US Treasuries and the use of

the euro as a reserve currency

Recent proposals contend that a common European government bond would satisfy the

global demand for a risk-free asset and better compete with US Treasuries for the global

financial flows in search of a safe investment. The “safe haven” argument is based on the

idea that, since safe German Bunds are in scarce supply, a common Eurobond with similar

credit risk characteristics, but greater liquidity, would attract the demand by international

investors and thus would reduce the borrowing costs for the euro-area sovereign issuers. A

single debt instrument would also strengthen the use of the euro as international reserve

currency.

Indeed, even German Bunds appear to suffer from a lack of liquidity or international

benchmark status compared to US Treasuries: before the financial crisis, they have been

paying a premium as high as 40 basis points, though their credit risk is practically zero.

9 For France this argument applies only to 10-year bond.This suggests that, even benchmark

issuers, such as Germany and France, for which the gains from further integration have always

been thought to be small, could benefit from greater liquidity if the common issuance market

approached the size of the US market.

Liquidity is, however, not enough; for a common Eurobond to achieve the status of a “safe

haven” international benchmark, its credit standing should be as high as that of German

Bunds. Indeed, evidence from the global financial crisis is consistent with a flight to credit

quality more than liquidity. As shown in Section 2, the widening of interest-rate spreads on

the bonds with lower credit standings is completely explained by their higher credit risk as

measured by CDS spreads. Higher liquidity premia, or portfolio shifts towards German

Bunds, can account for an increase in bond spreads only in a few Member States: Finland,

France and The Netherlands. However, even the French spread during the euro-area debt

crisis is mainly explained by an increase in credit risk as measured by the CDS spread.

Whether

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