The discussion about Eurobonds has flared up last week. This also happened during the Greek debt crisis, and probably will again in the future – until a solution is found to the imbalances within Europe. Meanwhile, the euro is once again the victim.
We are far from there yet, but the tone of the news during the present corona crisis has been gaining in optimism in the last few days. The stock market has already taken a substantial advance on this. Leading stock market indices rebounded by more than 20% in less than three weeks. In the forex world, the focus is mainly on who will be paying the bill for the economic damage once the crisis has subsided. It is within this context that the European finance ministers are having a very heated discussion on Eurobonds. Southern European countries most affected by the corona outbreak believe that common European bonds will provide them with a way to finance all support measures. However, Northern European countries – with the Netherlands at the forefront – are resisting.
Ongoing fires in Southern Europe
‘If your house is on fire, I’d be happy to help you put it out, but I don’t want to take over your mortgage’, was how comedian Arjen Lubach’s illustrated the sentiment in the Netherlands. That one-liner may be a bit blunt, but he does put his finger on the sore spot. It’s not the first time that ‘fires’ need to be put out in Southern Europe. The idea of Eurobonds was also put forward during the European debt crisis at the end of 2011. A Eurobond is a loan in which all European countries are joint guarantors. This can benefit countries that are themselves able to issue new loans on less favourable terms, because investors have less confidence in their ability to repay those loans. The situation resembles that of Greece in 2011 – or Italy today.
Borrow money? It was never cheaper!
The interest rate on a ten-year Italian government bond increased almost by twofold, to 1.65% in just over six months. Italy will therefore lose more than €1.5 billion a year if it now borrows an additional €100 billion to keep the economy going. By way of comparison: if the Netherlands does that, the government will receive almost €70 million a year at current interest rates. The reason for this difference is that the Netherlands has put its housekeeping book neatly in order. Public debt as a percentage of the GDP has fallen from 67% to less than 50% over the last six years. In Italy, on the other hand, this debt ratio has gradually increased to 138%.
Difficult dilemma
However, the Netherlands faces a difficult dilemma together with other Northern European countries. Rejecting Eurobonds would result in putting the country’s relationship with Italy – and actually the whole of Southern Europe - under considerable pressure. With the current attitude, this would mean robbing those countries of the means to rekindle their stagnant economies. And perhaps this time the fire can be extinguished without Eurobonds, but it’s just a matter of time before the fire starts raging somewhere else. The danger remains that one day the fire will be so fierce that the whole European Union will fall apart. Meanwhile, forex traders are working hard to price this kind of risk. While the stock market prices flew up, the euro gained ground against dollars and pounds in recent weeks.
Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the forex world. This column reflects his personal opinion and is not intended as professional investment advice.