02.09.2019: EUROBONDS

SUISSE BANK PLC is often asked by international customers what their opinion is of so-called Eurobonds. This could be an interesting asset class for the conservative capital investor. People who had earlier placed government bonds of individual countries in their portfolio, purchased a mix of risks consisting of various securities. Government bonds where the country issuing them has a high credit rating offer relatively low levels of interest, while bonds with a low credit rating offer higher levels of interest. A Eurobond would combine the credit ratings of all the EU countries and offer an average low return. As stated, this is a very conservative option which is suitable for institutional investors who are tied to a specific purpose and may not make losses, but it is also an option for very cautious investors. The shareholders of SUISSE BANK PLC tend to have a rather different outlook, and at this point in time we must also say that SUISSE BANK PLC views the use of EUROBONDS in a rather critical light from a macroeconomic point of view.

Eurobonds are bonds which should be jointly issued by all the Euro states. Their advocates would like to have a situation in which the peripheral Euro states have the option of purchasing cheaper rates of loan interest on the back of the credit rating of all the Euro states. If we take notice of the fact that a lot of the fringe states have to offer double-digit levels of interest for their government bonds to find any purchasers, it is no surprise that animated discussions are taking place (and threats are even being made by the politicians).

SUISSE BANK PLC feels the problem is the fact that countries that have been strong up to now could be additionally burdened with higher financing costs, while weaker countries could “comfortably” sit back and the incentives urgently required to rectify the problem could be watered down.

SUISSE BANK PLC compares the advantages and disadvantages of Eurobonds:

  • Advantages

Countries at risk of going bust have had to face the power of the financial markets on their own up to now. With the aid of Eurobonds, they can once again obtain loans on moderate terms and conditions – and this is because the robust states are on board for each individual bond and this reduces the average risk.

  • Disadvantages

Joint liability for debts would probably make it even less attractive for weak Euro countries to actively reduce their debts and increase savings. The stronger countries would thus assume at least a proportion of the losses of the weak countries, but they would have no control over the measures to be put in place, as can be negotiated when assistance is provided to individual countries.

SUISSE BANK PLC estimates that this could mean interest rate increases of around 2.5 percentage points for strong countries such as Germany, and thus a volume of around € 50 billion per year which they would be faced with as an additional burden. Thus, if the countries opt for this route to heal the European Economic Area, this can only happen subject to certain requirements and conditions for the countries in favour of it to ensure the desired effect can be achieved in the first place.