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24 Nov, 2011 11:16

Putting lipstick on the PIIGS

Calls to introduce Eurobonds to help debt-ridden EU countries raise capital are growing louder, but also causing friction within the union. Fiscally-responsible countries strongly oppose the idea, saying it would lead to a rise in borrowing costs.

European Commission president José Manuel Barroso has supported the creation of a new Eurobond, saying that it would be "an example of reinforced governance, of a strong will to live together in the euro area, and a good example of discipline and convergence."Barroso, however, admitted that Eurobonds would not solve the immediate fiscal problems of the EU.Germany, the largest economy in the EU, strongly opposes the idea saying it would lead to a rise in German borrowing costs and pile debt burdens across Europe. Chancellor Angela Merkel has called Eurobonds an “inappropriate solution” to the crisis.Meanwhile, a German bond auction flopped on Wednesday, selling less that 60 per cent of an issue of 10-year bonds. The executive-director of the investment advisory firm DV Advisors, Patrick Young, says countries like Germany, Austria and Finland are opposed to the Eurobond idea because they have long reaped the rewards of being fiscally responsible.“You can go and borrow money at a very, very low interest,” he says. Young believes that the Germans see a Eurobond as a case of “putting lipstick on PIIGS.”“The problem is if you are one of the PIIGS countries, or you are somewhere like Greece, you can’t borrow any money because you are essentially no longer a welcome member of the borrowers’ club,” he said. Countries which are currently shut out of the borrowing market or have to borrow at very high interest rates want to be part of such a club. “[Debt-ridden countries] hope they will be able to borrow money and they will be able to borrow it much, much more cheaply.”  Patrick Young believes that an appalling recession is going to take place unless the EU gets its act together and gets the European economy moving properly, so that all nations can borrow money and therefore service their debts.“This crisis is like a pandemic of financial panic, because ultimately you have individuals who are managing pension funds,” he said. “And when they wake up in the morning, they have got to do something with our money for the next five or ten years. Ultimately, the most important forfeit right now is to keep that money safe."“And as I’m sure you appreciate, nobody really feels safe in the eurozone,” he concluded.