The European Debt Mutualization Options Matrix

Tyler Durden's picture

Heading into the EU Summit at the end of June, talks about potential debt mutualization proposals to deal with the eurozone debt crisis had gained momentum. Ultimately, as Barclays points out, the Summit produced an agreement in principle to achieve banking and fiscal union in the medium to long term. However, this commitment was lacking detail and as we pointed out earlier, is now critically exposing once again the fundamental flaw of disunited and self-interested European union of idiosyncratic nations. While the decision to give the ESM the 'capability' to recapitalize banks directly solidified the medium-term commitment to a financial markets/banking union, there were no specific announcements/agreements from the EU Summit on various debt mutualization possibilities for the near term. If the eurozone debt crisis worsens, such that Spain loses market access and needs to be put into a full program (which a 7% yield and recent auctions suggests), policy makers will be required to give some serious thought to alternative plans, and in particular an accelerated move towards some form of debt mutualization - those options are laid out simply here (in all their unlikely transfer-of-sovereignty scenarios).


Barclays: Eurozone Debt Mutualization options, A Comparison

Market developments might relatively quickly push policy makers to consider various debt mutualization proposals, which will likely require significant transfers of sovereignty. In addition, most of these proposals come with varying degrees of challenges in terms of time to implementation, effectiveness of firepower, costliness to core countries and moral hazard. Of all the proposals, we find the ESM gaining a banking licence and leveraging itself at the ECB to be the most practical solution, especially in reaction to an acute funding crisis. However, legal considerations could prevent this from happening in the near term. Among the remaining potential choices, we believe Euro T-bill and Debt Redemption Fund proposals also look promising.

Our approach here is to attempt to analyze the proposals separately by taking into account all of the criteria. The ultimate goal for the eurozone in the long term (ie, around 10 years) would be a fully fledged Eurobond solution once the economic and fiscal integration of Europe is in place. And this would require strong implementation of existing frameworks/plans such as the fiscal compact and European Semester stability plans by all eurozone members, but also an ultimate development of a fiscal body at the eurozone level (such as a central treasury/budget office), which would imply completion of transfer of sovereignty. As such, proposals such as ESM gaining a banking license and Euro T-bills can be seen as initial milestones on a roadmap for Europe, which will ultimately lead to a Debt Redemption Fund or fully fledged Eurobonds.

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q99x2's picture

They should wait until after the collapse and it will be a lot less expensive.

Yen Cross's picture

Nice "under the radar" Tyler!

                                              permanent/constant can kicking.

Expatriation has it's pluses!


Yen Cross's picture

 That shadow / can kicking lender of last resort Tyler!

    I guess I should post that " late autumn" , 2011 " idea"?



    That Black bank of last resort?  The bank that supercedes all banks?

Peter K's picture


Is it just me, or didn't the Germans just say NEIN to all iterations of debt mutualization? And aren't we on the cusp of the Constitional Court forcing the German gov into a referendum about any further actions regarding guarenteeing Euro debt? So talking about further debt mutualization should be discussed after all these member states have a viable plan for Euro breakup. Because that is were this is heading. 

Ghordius's picture

the delusion consists in banksters used to have all their whims applied by the politicians. the whim is that it would be wonderful business for the banksters if we in the eurozone would set up eurobonds or break up. the strange fact is that they are so used to fawning and bought politicians that they are completely flummoxed by the refusal of the EZ governments. therefore get used to this constant call for eurobonds and or euro-break-up until they find another candy they want.

meanwhile, the eurozone is working as designed. this years are not behaving in the way of the main scenarios, but they are behaving in a strange mixtures of the scenarios that where the bloody reason for the blasted EUR.

oh, and just have a look at gold prices in EUR, instead of USD or GBP. do you notice something?

CrashisOptimistic's picture

The Germans have to decide if they want to buy their own exports, because very rapidly that is what sending German money to EU countries is evolving to mean.

 They have no other reason to do it.  They are just trying to support their own exports, which are bought by those countries.

debtor of last resort's picture

Exact. Profits for multinationals, and for the Muppets low wages jobs. I hope banks will burn before that. Don't want to be a corporate slave.

TheGardener's picture

I don`t get the untagged /sarc of the article.
Guest post by NWO ?

Yen Cross's picture

 Tyler is " looking for" ? Hey Tyler , Hub  Caps?

Global Hunter's picture

"seismic",   Bonnets!? Mocking hummin Tyler BIRD

bigwavedave's picture

Just watch the Tour de France to see European Unity in action. LOL

dunce's picture

The recapitalization of the euro banks seems to boil down to the tier one asset that is the german taxpayer and indirectly the american taxpayer.

Vegetius's picture

All of that stuff might work on paper but the small issue is people. Yep these pesky people who are beginning to see their and their children’s futures go down the toilet, the same kind of people who committed the Terror in France the Red Terror in Spain and Russia the White Terror in Russia etc. etc.

Pressure is coming on and the Elite are squeezing the plebs to maintain their position “Plus ça change, plus c'est pareil”. Things will get more unpleasant here in Europe as for the leaders fixing things my advice to them is stash money overseas, multiple passports, be ready to run!

allbetsoff's picture

SOME MORE BREAKING NEWS.... Bon día des de Barcelona..  Spanish ten year hitting 7,2% right now...  May be we´ll see an attempt at emergency debt mututalization over the weekend..  I have complete faith in our fearless eurocrats to lead us through these times of peril.. :-)

Trying to Understand's picture

" the end of June".... should this be July???