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?


  1. It's all falling apart methinks, the bond crash is gathering momentum. Headlines on a sell off in the US market today.

    Ben can't print his way out of this one, the awful price of home-owner-ism will soon become apparent.

  2. There are a lot of people that have tried to short 10yrs and ended up being torn another one. It was a country that had experienced an enormous property boom and asset bubble, had enormous government debt to GDP, had done mountains of QE, Japanese 10yr yields are 1.2%

    Saying that, I have been limit short gilts...

  3. (sorry about the spam filter....)