By Peter Koh

BRUSSELS (MNI) – The European Commission will soon present a paper
outlining to EU lawmakers the different options for jointly-issued debt
instruments referred to as eurobonds, European Commission President Jose
Manuel Barroso confirmed Wednesday.

Some types of debt that could be jointly issued by Eurozone
countries would require changes to the treaty that underpins the
European Union, Barroso told the European Parliament in Strasbourg.

However, eurobonds would be “no quick fix” for the crisis, the
Commission president said.

Although the Commission has been tight-lipped about the options it
will present, people familiar with the debate say one of the
possibilities that could require a treaty change is a plan for so-called
“blue bonds.” Under this plan, countries could issue a limited amount of
bonds backed by all EMU countries up to a certain percentage of their
GDP, say 60%. However, given that current debt levels of most Eurozone
countries already surpass 60%, few states would be able to issue such
blue bonds anytime soon.

The ability to issue debt beyond that limit, so called “red bonds,”
would depend solely on individual countries’ credit ratings.

Another idea that would require significant changes to the EU
treaty is the establishment of a mini version of the International
Monetary Fund for the EU, which would issue bonds backed by the same
kind of mechanisms and guarantees from central banks that the IMF
enjoys. This approach could face opposition from the European Central
Bank, according to a source familiar with the institution’s thinking.

Central issues in the debate include how to make the structure
clear enough for the market to accurately price the debt and how to
ring-fence the more creditworthy euro area countries from the
liabilities of other members. AAA-rated governments with low borrowing
costs will be very reluctant to agree to anything that raises their
funding costs.

While any of the above ideas could face substantial opposition from
some governments, EU countries already issue some forms of collectively
backed eurobonds.

Bonds issued by the European Stability Mechanism, including one
expected this week to help fund financial assistance to Portugal, are
backed by the Commission and the EU budget, to which all EU member
states contribute.

The Eurozone’s bailout fund, the European Financial Stability
Facility, also issues a kind of eurobond, because its debt is backed by
the 17 countries that use the currency, according to the proportion of
their capital subscriptions to the European Central Bank.

Although the options that would require a treaty change are
attractive, because they could create a larger, more liquid market, the
difficulties of renegotiating the treaty, a process that likely would
take years, could prevent them from seeing the light of day.

Strong determination would be needed to get them off the ground,
and it is not clear that Eurozone leaders have the stomach or the
popular backing for such moves right now.

–Brussels newsroom +32495228374 pkoh@marketnews.com

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