Tuesday, 7 December 2010



In yesterday's FT there was an article by JC Junker and G Tremonti outlining a proposal for the EDA (to be created European Debt Agency) to issue "E-bonds" up to 40% of eurozone GDP.

They also suggest that there be a switch option for holders of eurozone member sovereign debt.
The conversion rate would be at par but the switch would be made through a discount option, where the discount is likely to be higher the more a bond is undergoing market stress. Knowing in advance the evolution of such spreads, member states would have a strong incentive to reduce their deficits. E-bonds would halt the disruption of sovereign bond markets and stop negative spillovers across national markets.

For some reason they believe that Eurozone countries would treat the EDA in a superior way to the private market creditor, even though the EDA wouldn't have the bark of refusing to buy more debt, or politically the teeth of being a local voter when it came to a default.
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design" Hayek, could not seem more appropriate.
The "cure" to reckless sovereign borrowing, buyers ignoring risks and moral hazard is obviously to create another EU body, with a more complex system, with even less market discipline?