Eurobond argument ignites

EUROZONE leaders are locked in a dispute about whether to issue region-wide bonds, even as the European Central Bank (ECB) steps up its intervention in the bond markets to try and stem the rise of gilt yields.

Luxembourg Prime Minister Jean-Claude Juncker and Italian finance minister Giulio Tremonti yesterday called for the creation of Eurozone bonds to shore up the “irreversibility of the euro”, but the idea immediately drew heavy fire.

German chancellor Angela Merkel declared that the idea would go against current EU treaties while Austrian finance minister Josef Proell said: “I am very, very critical of the eurobond idea. It can’t be that each country, which like Austria has run a disciplined economy, has to pay up.”

The argument follows the announcement last week that the Eurozone’s bailout fund will issue €5bn-€8bn (£4.2bn-£6.8bn) of euro-denominatd bonds in January. Some see the action as a precursor to the creation of a single Eurozone sovereign debt market.

But Germany is likely to strongly resist: its borrowing costs are currently 2.85 per cent for 10-year debt, versus 4.5 per cent for Italy, while a Eurozone bond yield would be likely to sit in between, increasing German costs.

Meanwhile, the ECB continued its intervention in secondary bond markets in a desperate bid to stop the rise of peripheral Eurozone debt yields. Figures released yesterday reveal that it bought €1.97bn’s worth of bonds in the week up to 3 December.

However, the intervention is a far cry from its dramatic actions in May, when it soaked up €16.5bn of bonds in one week. Economists are doubtful that the Bank can achieve anything more than a temporary respite.