News CLICKY

Won't that just create a repeat of the circumstances that allowed this mess in the first place. Poor countries borrowing more than they can afford using richer countries currency/credit rating.
Any bonds issued should use the weakest countries credit rating, not the best's.

As I understand it, the general theory is that if the borrowing is joint, everyone gets a cut of the Eurobond according to their GDP. If Germany and Spain both have constitutional laws restricting their budget deficits to no more than 3% of GDP (which should soon be the case - subject to exceptions), then with Eurbonds this cap will effectively apply to all.

Countries like Greece will be beholden to the ECB for their share of the Eurobond repayments. If they want to borrow above the group level, they will have to go to the markets and issue their own bonds, but the cost will be so outrageous that this will be denied them, so fiscal unity will occur. The problem with Greek bonds came about because the markets always assumed that when push comes to shove the Germans would underwrite Greek bonds without complaint. Had they done so, it would have been cheaper for them. The complaining they have done - and all the foot dragging political farce that accompanies it - has contributed a lot to the rising cost.

In the unlikely event that the Eurobond plan ever gets off the ground, I expect the markets will clap for five minutes, and then panic again anyway. None of the players involved has big enough balls for this game, and this play is coming too late. Most of southern Europe needs vigorous economic reform as much as it needs Eurobonds, but the availability of this shared liability lifeboat would give them an opportunity to cheat again. That would be politically cheap for the likes of Berlusconi, but fically ruinous for Europe.

The unthinkable option is to expel Greece from the Euro right now. It would cause untold panic, and Greece would immediately default, but the Italians would finally start paying attention (one can only hope so anyway) before it's too late for them too, and with them, the entire Euro.

An even more unthinkable option is to completely reform the Euro. Set out a fiscal chain of command, and make certain demands of all member economies; highlighting open markets and competitiveness requirements, tax harmonisation and all the other violations of sovereignty that are clearly required for this pseudo currency to actually work in the longer term. That would lead again to the immediate expulsion of Greece, and huge political problems (of economic variety) in Spain, Italy, Portugal. It would probably provoke constitutional crises across the entire Eurozone as well - not least in Germany itself.

The most unthinkable option is to admit that the Euro was a political fudge from the start, which is the most open secret ever, and it was holed beneath the water line from day 1. So scrap Euro I, create Euro II. Only include countries that have sufficiently competitive economies and a democratic mandate to enact proper fiscal unity. I doubt it could expand beyond four or five nations within a generation, and it would still need to have a proper mechanism for kicking idiots out of the club (the most absurd of the many oversights in Euro I).

All they have done so far is kick the can down the road, hoping for miraculous deliverance. The rubbish partners are all pretending nothing is wrong until it's too late to sort their mess out sensibly, and nobody is accepting responsibility for anything, which leads to nobody doing anything. Further inaction leads to more intractable problems, and eventually to more unthinkable solutions.

Much of this could have been avoided by either letting Greece go through an orderly default, or just bailing them and Ireland out properly - with debt restructuring.

The real problem has been banks lending abroad recklessly. It is these problems that are causing the crisis. RBS are looking at another £45 billion of losses in Ireland defaults. France and Germany both lent massive amounts to the periphery and really should have been stopped by their bank regulators.