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The 19-State Solution:

A Eurozone Government Bond as a credible solution for Greece

July 7, 2015

There has been a lot of head-scratching about how to solve the Greek debt crisis. As an American living in Paris for over twenty years, I consider myself an outside observer of how the local media and their called-upon experts have explored the problem. They seem to stop short of evoking a federal (read: Eurozone), mutualized bond option. One solution that must have occurred to bond market practitioners is the obvious choice of mutualizing, at least at some level, Eurozone government debt. This solution is not as bold as it may sound.
An underlying problem is that this choice has been definitively rejected by Germany (France is inaudible on the issue) that it is not even on the table as a possibility. However, if we look at U.S. government debt, we can certainly be reassured that this two-tier system – state and federal – works quite smoothly and has for decades.
Just as in Europe, the U.S. model is a federation of states. These states have their local and regional characteristics and stark differences in, among other metrics, economic strength.
As an example, if an investor has faith in the future of California, they can invest solely in bonds issued by the state of California. However, that same investor is just as likely to purchase bonds issued by the U.S. federal government, the overarching body, issued by the U.S. equivalent of a central bank, the U.S. Federal Reserve. So, when one buys the famed “T-Bonds” (T for U.S. Treasury), in fact they are buying an instrument that is shared by reliable economic locomotives such as the states of California and New York, but also consistent laggards such as Alabama and Mississippi. No one is calling out the Southern States as being weak or bringing down the nation’s credit rating or compromising the collective financial might. Indeed, it is inherent to the federal system and accepted by all as the price for an enduring union. So state debt continues to exist alongside federal debt, and both have strong investor appetite. States rights and state sovereignty have in no way been compromised.
Why then cannot Greece benefit from a shared bond instrument that is backed indeed by all 19 members of the Eurozone? What works for 50 states in the U.S. could work for the 19 states here. Certainly if Greece’s debt was folded into that of France and Germany, there would be a strong appetite in the world bond markets to hail in a new era of financial solidarity and integration that sooner or later is a necessity of any federal system. No doubt France and Germany’s credit ratings may suffer ever so slightly – but by a hair, and be compensated by investor applause for taking the financial lead. Likewise, France and Germany’s borrowing rates would rise, but mechanically, and only by a hair, and probably temporarily. Sovereignty has not been infringed, because France will continue to issue their OATs and Germany their Bunds. Finally, and perhaps most significantly, it would also be the creation of a new financial product, one that could go toe-to-toe with the U.S. dollar denominated T-Bond.
If European institutions were built strong enough and sturdy enough to successfully roll out the Euro from 1999 to 2002, to recall all the local currencies and keep the economies humming – a project management success story if ever there was one – then indeed the issuance, investor relations, middle and back office operations, clearinghouse and settlement facilities necessary for such an endeavor could only succeed if backed by political will.
Until now, when financial push comes to shove, Europe caves. This is a shame, because there are enough ways to measure global investor appetite and objectively it is probably quite strong. If this option were put to the international financial markets, Greece’s economy could be saved in a matter of weeks by market mechanisms. Bailouts and extended credit lines are just a distraction. Let the bond markets save Greece and preserve the Euro once and for all.
Ellen Kountz is a finance lecturer at business schools throughout France.