Britannia Radio

If I were German Chancellor I would not take kindly to this.  After 
all,  the euro was only able to be launched in the first place when 
the Germans obtained a guarantee that that they would never have to 
cover for the debts of other member states.  A.E-P's "apoplexy" seems 
a mild forecast.

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TELEGRAPH    5.1.09
Luxembourg calls for an EU Treasury to bolster eurozone
    by Ambrose Evans-Pritchard

Germany is coming under mounting pressure to rescue Europe’s weaker 
states by agreeing to an EU agency with powers to issue bonds for the 
eurozone as a whole for the first time.

Any such move would amount to the creation of an “EU Treasury” to 
back up the single currency, in effect compelling Germany to share 
its elite credit rating with weaker states such as Italy, Greece, 
Spain and Ireland.

Jean-Claude Juncker, Luxembourg's premier and chair of the eurogroup 
of finance ministers, said the time had come to start preparing for 
some kind of debt-union for the 16 countries sharing the euro, giving 
the bloc a supranational body to match the US Treasury.

“We need to think about a better way to manage our public debt 
together.  One could imagine, for example, the creation of a European 
agency able to emit eurobonds,”  he told the French daily 
“Liberation”  .

“It is true that Germany would lose today’s advantages under such an 
arrangement because it enjoys a higher level of confidence than other 
countries in the eurozone.   But according to our calculations this 
would not necessarily be the case after two or three years” he said.

The proposal is certain to cause apoplexy in Berlin where any 
suggestion that German taxpayers should be made liable in any way for 
the huge public debts of Europe’s weaker states is a neuralgic subject.

Italy’s finance minister, Giulio Tremonti, has repeatedly pressed for 
some sort of EU body to issue bonds to help countries weather the 
economic downturn.  The European Investment Bank can raise debts for 
project finance but is not allowed to use the funds as a ‘counter-
cyclical’ tool to fight recessions,  although critics say it has been 
edging in that direction by steering large sums to Europe’s 
struggling car industry.

The comments from Mr Juncker - who speaks for the eurogroup’s 
majority - suggest that these proposals are rapidly gaining traction 
in top EU circles.

They come as the yield spreads on eurozone sovereign bonds surge to 
the highest level since the launch of the euro, indicating  that 
investors have begun to fret seriously about the credit-worthiness of 
high-debt states.

The spreads on Greek 10-year bonds have reached 223 basis points over 
German Bunds since the outbreak of riots in Athens a month ago up 
from the mid 20s before the credit crunch began.  This means that the 
country will have to pay a stiff premium to roll over some €40bn 
(£38bn) of public debt this year.

Italian spreads have reached 134 basis points.  While this is 
manageable in itself it is causing interest costs on Italy’s huge 
debt - Europe’s biggest at 107% of GDP - to creep upwards adding to 
the budget deficit.    A number of hedge funds are watching closely 
as the Italian Treasury prepares to roll over  €200bn of debt this year.