Topic: Can the issue of Eurobonds be a solution to the current debt crisis? Word count: 697
Eurobonds is definitely the solution for Euro-crisis?!
By Jean-Timothy Leonora in Netherlands Published: September 30 2011 08:00
This euro-crisis is driving everyone crazy: residents, investors, companies, countries and so forth. Everything started with the credit crunch that hit the VS in 2007; first victims were the house markets, followed by financial institutions, than the whole banking system had liquidity problems which led to disturbance in the international financial system and nowadays we are dealing with the Euro-crisis. Greece is now facing probability to go bankrupt. What should we ...view middle of the document...
Public debt GDP Growth (Billions (Billions rate Inflation Unemployment €) €) (%) rate (%) rate (%) 160.5 172.7 1.3 1.4 11.0 1843.0 1548.8 1.3 1.6 8.4 148.1 328.6 638.8 3118.9 7858.4 156.0 230.2 1062.6 3170.3 10216.8 2010 -0.4 -4.5 -0.1 -1.6 4.7 2.0 Longterm interest rate (%) 10.9 5.3 9.6 13.7 15.9 12.6 20.1 5.3
Table 1 Portugal Italy Ireland Greece Spain PIIGS EU-17
Sources: ECB, European Commission and Eurostat
In both cases Eurobonds can be of help (see chart 1). Eurobonds will drive the long-term interest rate of all EU-17 countries to an average of 4.4%1. Downside of issuing Eurobonds is that the big economies like Germany and France will have a higher interest rate to bear in the early phase of the
Eurobonds are currently trading at an interest rate of 4.9-5%. The calculation is in the Appendix: table 2.
implementation, but are we looking at a small or bigger picture? If we want to save the EU, we need to look at a bigger picture. Even if the interest rate increases for these big economies, the ECB could intervene and drive the interest rate down by buying some of the Eurobonds. Issuing Eurobonds will save Greece and of course also the other countries that are here at stake.
If we don’t choose now for Eurobonds, Greece will default. Default will in turn create more uncertainty, because peoples are afraid about the contagion spread, in an extreme case this uncertainty can lead to bank runs. What’s next?, Italy; how are we going to save Italy? Italy’s interest rate is already increasing and that’s costing them to cut their government spending, lowering benefits and public services provided. The total welfare is here at stake. If we go for the Eurobonds, this could drive the interest...