A European Central Bank (ECB) board member has called on governments to consider launching a common bond so as to stave off another sovereign debt crisis amid the coronavirus outbreak.
Carlos Costa, who is also governor of the Bank of Portugal, said issuing a “coronabond” would stop financial markets from targeting the “weakest link”.
There has been a growing chorus calling for more radical and cooperative measures from Eurozone governments in recent days in the face of coronavirus, which economists say is going to cause a deep recession.
Policymakers in so-called periphery nations such as Portugal, Italy and Greece are particularly concerned to avoid a return of the dynamics of the Eurozone crisis of the early 2010s. The crisis saw bond yields jump and governments fail to pay their debts.
“Failure to cooperate in this crisis would permanently scar the European project,” Costa wrote In an article sent to Reuters. He added that “solutions must be found in order to avoid that the coronavirus emergency becomes a second sovereign debt crisis”.
Costa said he saw jointly issued bonds as “the appropriate solution”. Yet he said the Eurozone lacked the structures to issue the bonds as so must be bold and creative.
“One option that deserves further analysis is the possibility of having the European Stability Mechanism [ESM] issuing ‘coronabonds’, with the proceeds being channeled to all Member States in need,” he said. The ESM is a Euozone bailout fund.
Proponents of Eurozone-wide bonds argue that they would let European governments raise money without the threat of markets driving up the price of borrowing.
So far during the coronavirus crisis, yields on Portuguese and Italian debt have risen as their bonds have been sold (yields move inversely to price), pushing up borrowing costs.
Northern European governments such as Germany and the Netherlands have traditionally been opposed to such radical ideas, although there are signs that severity of the coronavirus shock is causing a shift in opinions.