Some readers are asking whether issuing EU bonds is possible under the Maastricht Treaty. The answer would seem to be yes, under article 119. As follows:
Article 119
1. Where a Member State is in difficulties or is seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardise the functioning of the common market or the progressive implementation of the common commercial policy, the Commission shall immediately investigate the position of the State in question and the action which, making use of all the means at its disposal, that State has taken or may take in accordance with the provisions of this Treaty. The Commission shall state what measures it recommends the State concerned to take.
If the action taken by a Member State and the measures suggested by the Commission do not prove sufficient to overcome the difficulties which have arisen or which threaten, the Commission shall, after consulting the Committee referred to in Article 114, recommend to the Council the granting of mutual assistance and appropriate methods therefor.
The Commission shall keep the Council regularly informed of the situation and of how it is developing.
2. The Council, acting by a qualified majority, shall grant such mutual assistance; it shall adopt directives or decisions laying down the conditions and details of such assistance, which may take such forms as:
(a) a concerted approach to or within any other international organisations to which Member States may have recourse;
(b) measures needed to avoid deflection of trade where the State which is in difficulties maintains or reintroduces quantitative restrictions against third countries;
(c) the granting of limited credits by other Member States, subject to their agreement.
Indeed not only are such bond possible, the initiative has already been taken in the case of the Hungary bailout last November:
“The European Commission stands ready to provide a loan of €6.5 billion to Hungary,” the EU executive said in a statement on Wednesday (29 October), adding that “the concrete modalities will shortly be finalised in cooperation with the Hungarian authorities”.
Under the plans, the Commission will borrow money from the markets using EU-denominated bonds and then lend it to Hungary, without drawing from the EU budget. The facility is established under Article 119 of the Treaty.
It is the first time that Brussels has used the instrument to help an EU country (see background). The facility foresees an overall ceiling of €12 billion of outstanding loans. This funding is limited to EU countries which are not part of the euro zone.
The money will be collected on the financial market on behalf of the European Community. Rulesexternal governing the use of the facility enable the Commission to issue directly “up to €4 billion” in EU bonds, with maturities ranging between three months to 30 years. “The size reflects a realistic assessment of near-term financing needs and could be rapidly increased at the Commission initiative, if needed,” according to the EU executive.
Goldman Sachs and Deutsche Bank are responsible for placing the bonds with European and international investors.
That’s it for this post. I will write separate posts about each of the four items in my package of proposals about how to respond to the crisis over the days to come. Basically the one I put up earlier today explaining “credit crunches” and “liquidity traps” in connection with the kind of issues which might likely lie in front of us was a sort of theoretical precursor, even if it is rather obscure and theoretical. I’m afraid these things are already becoming household words.
Ok, so what allows us to conclude that the EU (being the comission ?) will be able to raise enough money to bail out a major nation’s banking system?
What is the credit worthiness of the EU? What taxation is it supposed to be based upon?
“Ok, so what allows us to conclude that the EU (being the comission ?) will be able to raise enough money to bail out a major nation’s banking system?”
Well at the moment they are limited to 12 billion euros, but if you read the link Sarkozy is already proposing increasing to 20 billion euros, and 1,000 billion can’t be that far behind once all this gets started.
“What is the credit worthiness of the EU?”
The highest AAA, since it is backed by the combined financial strength of 27 states. This must be above US at this point, and definitely Japan. Of course it includes Romania whose debt only has junk bond status, but what would be the credit rating of Alabama if it had to issue separately.
The EU is only backing the bonds, not paying the interest and repayments – this is just like government level guarantees for bank lending.
What sense does it make for the Greek government to have to pay all that extra interest as the yield curve goes up, surely the money would be better spent financing economic reforms (remember, I am arguing for a new pact with teeth) and stimulating the economy, not in fighting a losing battle with “punters” all the way down to default.
“What taxation is it supposed to be based upon?”
The taxation of the member state. The issue would only come to a head in the event of total default by any member state, in which case these bonds would be the least of outr problems. Also, I imagine there is away that they could be sufficiently “seniored” to guarantee the Union was first among creditors in the event of default.
But this is all only a first step. There will have to be transfers from one member state to another which will be funded by taxpayers in another state at some point, I am quite open about that. But then, as far as I can see, we do this, or the eurozone meltsdown one country at a time, and your country Oliver won’t be among the last to hold out against default.
Remember, if Spanish banks are forced to default on 500 billion euros in syndicated loans, then this is coming quickly all the way back to your banks who lent them the money in the first place.
That leads me to two questions, again.
1) If we do this don’t we admit that same EU states are almost finished? Aren’t we supposed to fight panic, not cause it?
2) What about the older conventional bonds? Don’t we reduce them to junk bond status if we do this?
What I am afraid of is that we throw good money after bad money and make the consequences worse, should the scheme fail.