Poll finds qualified support for Stability Bonds
The issuance of common sovereign ‘stability bonds’ could help solve the Eurozone debt crisis, but other factors have to be in place as well, according to a poll of investment professionals in the EU and Switzerland.
The survey, conducted by the UK-based CFA Institute up to January 4, polled 798 members across the region. It was undertaken following the consultation launched by the European Commission on the feasibility of issuing sovereign bonds among Eurozone member states.
“Stability Bonds” are regarded as a potentially powerful instrument to address liquidity constraints and ultimately reinforce financial stability in the euro area. The survey found 52% of respondents agreed the resolution of the debt crisis should require common issuance of sovereign bonds among euro area States. Forty percent disagreed and 8% neither disagreed nor agreed with this.
Some 55% believed that such issuance would alleviate the debt crisis; 52% thought it would reinforce financial stability in the euro area and 56% considered it would “facilitate the transmission of euro area monetary policy”. Thirty eight percent said it would improve market efficiency, while 41% disagreed.
Over two thirds (64%) of those polled agreed that the most effective approach would be joint and several guarantees, under which each state would be liable not only for its share of liabilities under the Stability Bond, but also for the share of any other state failing to honour its obligations.
In the debate around full versus partial substitution of Stability Bonds, 36% thought full substitution would be effective, while 64% said partial substitution with national issuance would suffice. Just over one third (35%) wanted an accelerated phase-in of Stability Bonds, while the rest of those polled preferred a more gradual approach.
Significantly, most respondents believed common issuance would only alleviate the debt crisis if it was part of a larger package of structural reforms, fiscal integration and a strong common governance framework.
The risk of moral hazard, where some states may follow poor budgetary discipline with limited implications for their financing costs, was a key concern. Consequently, the following were mentioned as necessary preconditions for participating states:
• Significant enhancement of economic, financial, and political integration (supported by 86 percent)
• Increased surveillance and intrusiveness in the design and implementation of national fiscal policies (supported by 88 percent)
• Limited access to the Stability Bonds in cases of non-compliance with a euro-area governance framework (supported by 90 percent).