The definition of a Eurobond pivots on two perspectives. On the one hand, Eurobonds are international public debt securities issued in a currency other than the currency of the country in which they are traded, not subject to the jurisdiction of any specific country and whose interests are net, as they are tax-free and withholding tax.
Eurobonds are related to issues outside the borders of the country of origin, but it does not imply that the bond has been issued in Europe or that they are denominated in euros. Not to be confused with foreign bonds.
Examples of Eurobonds:
- Bonds issued by a Chinese company, denominated in yen and traded outside of Japan.
- Bonds issued by Germany, denominated in US dollars and traded outside the United States.
The main characteristics of Eurobonds are:
- They are very flexible instruments, as they offer issuers the possibility of choosing the country of issue based on the regulatory context, interest rates and market depth.
- They are very liquid instruments, they can be bought and sold easily.
- Its issuers are varied: multinational firms, sovereign governments and supranational entities.
- They are very attractive for companies based in countries that lack a large capital market, although they also involve exchange rate risk.
- There is a growing percentage of issues coming from emerging markets.
Relationship of Eurobonds with Europe
On the other hand, the second perspective of Eurobonds is that they are also a theoretical proposal of the European Commission to issue public debt mutualised or socialized by all the countries that are part of the eurozone or by any of its institutions. These issues would be made through the ECB, foreseeably.
However, there are several reasons that prevent progress towards the consensus necessary for its definitive instrumentalization.
Causes that promote the creation of Eurobonds
The debt crisis suffered as a result of the 2007 financial crisis was the breeding ground for this approach. The peripheral countries of southern Europe lost the confidence of creditors due to the serious economic situation they were going through and were forced to offer their public debt bonds at very high interest rates.
In solidarity, the European Commission in 2011 proposed to help lower the financing costs of these countries, through joint debt issues that were guaranteed by the entire euro area, offering greater security to investors compared to independent national issues.
Advantages and benefited countries
The great beneficiaries would be Italy, Spain, Portugal and, especially, Greece. The joint issuance would provide them with the following advantages:
- Lower your debt compared to individual issues.
- Have the implicit endorsement of very solvent countries such as Germany or Austria.
- To alleviate the enormous financing differences between the countries that make up the eurozone.
- Provide greater stability to the single currency, replacing the bailouts and large structural imbalances of some members – hence they are also called "European stability bonds".
In addition, the euro area would be strengthened by advancing in economic integration.
Disadvantages and harmed countries
However, there would also be affected countries, such as Germany, Austria, the Netherlands and Finland, among others.
Northern and central European states, which started from healthier economies, opposed the proposal to share risk and did not see with good eyes having to finance the debt of countries with strong imbalances. Accepting the proposal would have meant for them:
- Mutualize the risk of the southern countries: In the event of the bankruptcy of any country, the rest of the States would have to take responsibility for the Eurobonds that that country had issued and return the money to investors according to the agreed term and interest conditions .
- Having to assume part of the extra cost that the market demanded from the southern countries for issuing debt, reflected in their risk premium (the difference between the interest rate of the debt of one State and another reference State).
- Narrowing of the spread of risk premiums between the central and northern states and the peripheral ones to the detriment of the former, for which it would increase.