Elaine Green

 

THE PROSPECT of a Eurobond is gaining ground among European officials as a possible solution to the woes of ailing eurozone economies subjected to market speculators. Such a bond could counteract spiralling rates, currently making the borrowing of money by some governments prohibitively expensive.

 

As a likely beneficiary of any pan-European low-interest bond, Greece would support its issuance but cannot actively promote it, Prime Minister George Papandreou told the Athens News on the sidelines of an economy conference this week. 

 

Portugal and Spain, which are also feeling the pinch of the global credit crisis, could also benefit.

Responding to questions from the Athens News, Papandreou appeared cautiously optimistic about a Eurobond as a source of lower-priced debt. On February 11, the heads of state meet in Brussels to discuss, among other things, whether to proceed with such a bond, he said.

 

 

Germany is the linchpin to the bond solution since it would have to be willing to pay a slightly higher rate than it does now with its bund, Europe’s benchmark.

 

“It will be up to Germany to decide,” Papandreou said. “It’s not our idea, but we support it.”

The interview took place on the sidelines of a conference on the economy in 2010, organised by The Economist.

 

Addressing conference delegates, Finance Minister Yiorgos Papakonstantinou stressed that while Greece would welcome a Eurobond, it cannot promote it because Greece is “not expecting any deus ex machina - we know Greece must solve its own problems and we intend to do so”.

 

Nobel laureate economist Joseph Stiglitz told the conference that the European obsession with reduction of deficit is misplaced. In the effort to reduce it, growth is stifled to the extent that it may lead to greater deficit, he said.

 

“Deficit fetishism is a mistake. No company would only look at its liabilities,” Stiglitz said. “The implication of the problem we are all facing is that cutting deficits in the wrong way can be counterproductive.”

 

In a sideline interview, the Athens News asked Stiglitz how a Eurobond might work in practice. 

“There are a number of different models,” he said. “One is that states would jointly launch a bond and then set rules as to which individual states would qualify to get money from the bond. Another method would be by underwriting the bond so that countries most in need would get better credit rates.”

 

Bankers and economists alike have agreed that Greece cannot sustain interest rates over 6 percent for bonds in their own right. Greece needs to raise a total of 54 billion euros in debt this year in order to meet its obligations. Stiglitz also questioned why the European Central Bank does not loan cash at around 1 percent to states.

 

“Does it not have confidence in governments?” he asked conference delegates rhetorically. “The ECB should loan states at the same interest rate it gives to banks.”

 

He said it was not fair to leave countries such as Greece to the mercy of speculators out to earn a fast buck from bonds.