Tags: Hussman | Eurobonds | Terrible | Idea

Hussman: Eurobonds Are a Terrible Idea

Wednesday, 30 May 2012 06:59 AM

Economist and fund manager John Hussman says eurobonds are a terrible idea.

European bonds (or stability bonds) are suggested government bonds issued in euros jointly by the 17 eurozone nations. Eurobonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to the eurozone bloc as a whole, which then forwards the money to individual governments.

Eurobonds have been suggested as an effective way to tackle the European sovereign debt crisis although they remain controversial.

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"Investors should understand that what is really being proposed is a system where all European countries share the collective credit risk of European member countries, allowing each country to issue debt on that collective credit standing, but leaving the more fiscally responsible ones — Germany and a handful of other European states — actually obligated to make good on the debt," Hussman writes in a note to investors.

"This is like nine broke guys walking up to Warren Buffett and proposing that they all get together so each of them can issue 'Warrenbonds.'"

About 90 percent of the group would agree on the wisdom of that idea, and Buffett would be criticized as a "holdout" to the success of the plan, says Hussman.

"You'd have nine guys issuing press releases on their 'general agreement' about the concept, and in his weaker moments, Buffett might even offer to 'study' the proposal.'"

"But Buffett would never agree unless he could impose spending austerity and nearly complete authority over the budgets of those nine guys."

And, since none of them would be willing to give up that much sovereignty, the idea would never get off the ground.

“Without major steps toward fiscal union involving a substantial loss of national sovereignty, the same is true for eurobonds," Hussman says.

The Huffington Post reports that, until recently, the idea of issuing eurobonds was dismissed as politically infeasible because it would in effect commit the EU’s financially most prudent members to guaranteeing the loans of its most profligate ones.

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Wednesday, 30 May 2012 06:59 AM
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