The much hyped EFSF(European Financial Stability Facility), which has fallen short of early expectations that it might be able to muster as much as 2 trillion to backstop wobbly Italy.The EFSF, after subtracting its current and expected commitments to Greece, Ireland and Portugal, has between 250 billion and 300 billion available.That's less than a year's borrowing for Italy.
The proposal to end the European crisis comes from the European commission calls for the Euro zone to use its combined strength in the bond markets to replace some or all the fund raising currently being done by the national governments. Germany remains reluctantly oppose to the idea fearing it would be stuck with the bill for the governments spendthrift ways. The European commission in a discussion paper suggests three options for issuing euro bonds.
1.The first option it discusses would be to substitute all national issues by governments with euro bonds carrying what it calls a "joint several "guarantee: meaning that euro zone state would pool the credit risk and each government would agree to guarantee the debt of every other government. Under this scheme all new government bonds will be euro bonds and the existing national government bonds would be converted in to euro bonds.
2.The second option would be to partially substitute national issuance with euro bonds up to a limit, of say 60%, of a country's gross domestic product, or up to a ceiling that could change depending on how closely the government complied with euro zone rules. These bonds would also be jointly and severally guaranteed. Beyond that limit, governments would still have to issue national bonds.
Those two options would require treaty changes, because they contravene the current treaty's clause forbidding one government from bailing out another, but the third option wouldn't.
3.This third approach would have euro bonds replace some national bond issues but the euro bonds would receive guarantees from each government only up to specific limits.The quality of the bonds issued under option three could be further improved by providing collateral, such as cash or gold reserves, or earmarking tax revenues, the paper says.This approach, the paper says, would “deliver fewer of the benefits of common issuance but would also require fewer preconditions to be met.“ These bonds would be unlikely to carry interest rates as low as those issued with joint guarantees.
