‘Safe Eurobonds’: a new trick to betray the south euro area countries

Aerial Photography. European Central Bank main building in Frankfurt am Main, Germany. (ECB Audiovisual Services, some rights reserved).

All along the years after the 2008-2010 financial crisis, which in the European Union took the form banking/government debt breakdowns starting with Greece, there were cries for the creation of a solid Eurozone. In every respect, these calls amounted to demands that super prosperous Germany accepts some degree of risk-sharing with the rest of the other 18 member states of the euro area. All that time Berlin stubbornly resisted the slightest financial mutualisation or risk sharing within the euro area countries.

The story is repeated again now with a new mutualisation for the Southerners. It’s about the issuance of a new financial instrument called ‘safe eurobond’ which in the face of it, mutualizes the debt of euro area countries. In reality though, it’s just a decoy, because it still penalizes the south and favors the north, exactly as the capital markets are doing today. Let’s take this story from the beginning.

The Greeks like the Irish

In the cases of the Greek, Irish, and Portuguese failures of 2009- 2010 the Teutonic intransigency forced the taxpayers of those poor close to default countries, to bear the full cost of saving the Eurozone banking system. And this, despite the fact that the German banks and, ultimately, the German taxpayer, should have accepted participating in the writing off of a part of those bad debts. At all times in economic history and more recently in the arrangements of the Latin American debt in the 1980s and the South East Asia defaults of the 1990s, creditors and debtors agreed to share the cost of the bailouts.

But no, this wasn’t the case for the poor South European countries. Affluent Germany has condemned those nations to repay in full, hundred per cent, the bad debts for which her mammoth lenders were also responsible. As a result, the Greek and the Irish taxpayers have to repay almost one GDP over the coming many decades to finance in full the bailouts. The arrangement provided that the Irish and Greek banking and government debts to German and French mega lenders were swiftly and fully transformed into government to government debt.

Saving the mega banks

In the transaction, the German and the French creditor banks, were paid off in full for their bad debts, despite the fact those debts were valued by the capital market at one third of their nominal value. The German and the French exchequers, the European Central Bank and other central banks of the euro zone, who have bought some Greek government bonds in the secondary market at a decimal of their nominal value, are being paid off by the Greek taxpayer at full nominal values.

As a result, they have realized capital gains of €10 billion so far. In 2012 and then again in 2015 Berlin and the other sovereign creditors had promised Athens to return those capital gains to the Greek exchequer, but the Germans aren’t honoring their pledge. Only France has returned to Greece those usurp gains though not in full. It’s really a sad story, but let’s return to the larger picture, where the perennial question remains, if and when is Germany to decide to return a part of her huge gains, which this country has realized after the formation of the Eurozone and the introduction of the single currency.

Safe for whom?

In the latest episode of this unbelievable series of financial racketeering, there comes a proposal for the issue of a new Eurozone financial instrument, the ‘safe Eurobond’. In the face of it all eurozone governments and major banks will be able to borrow through such paper, but once again there won’t be any risk sharing. Eurozone’s southerners will be charged much higher interest rates than the borrowers of the north. But the question is how much more? This was an idea ‘produced’ by the European Systemic Risk Board. This is a body functioning under the roof of the European Central Bank. Last week, it published a 303 pages report, proposing the introduction of this new borrowing tool.

After reading it carefully though, it becomes evident that the southern and the northern borrowers will be charged practically with the same interest rate differentials as today. Obviously, under this scheme there will be no risk sharing whatsoever amongst the 19 member states of Eurozone. As a result, the German exports will continue being favored by the creation of the single money union without paying any refunds. The country will still have no obligation to recycle its gains nor is to share risks with those who help create those profits.

Vanishing Banking Union

It’s the same old story as the creation of the European Banking Union. This was a hugely advertised project in the early 2010s, supposed to support the weak south Eurozone countries. At that time, the Southerners, the Irish and some other euro area nations had to be convinced to bear the full cost of the financial crisis, without any risk-sharing with the North. Politically then, the EU needed a sweetener to make this bitter pill palatable. As it’s clear by now though the European Banking Union is a dead thing. Italy is currently obliged to bear the full cost of saving its failing banks, without any help from the EBU ‘instruments’.

After the EBU project was completed in March 2014 this newspaper published a leader entitled, “Can the banking union help Eurozone counter its imminent threats?”. It concluded as follows: The European Banking Union will be a rather weak tool to help Eurozone confront the eventual future woes, that may arise…As things stand now, only the European Central Bank can act as a truly European agent and help Eurozone effectively counter its negative eventualities”. Alas, the past four years have proved accurate every word of this passage.