What are Eurobonds and how do they work

When a country needs to pay off public debt, it uses bonds : a financial instrument through which the government borrows money from private investors, forcing them to pay interest for a certain period of time. This interest is measured through the risk premium, the indicator that measures the level of distrust in the different countries of the financial markets. For example, in the case of Spain debt is issued every week through the sale of the Treasury Securities and the risk premium (which compares the debt with the German one) has already reached very high values. To try to get many countries in the European Union to issue public debt and interest to grow so much, we are talking about the creation of Eurobonds, common to all countries in the euro zone. So that you understand better and do not have any doubts, in .com we tell you what Eurobonds are and how they work .

What are Eurobonds?

Eurobonds is the name attributed to debt securities backed by all member countries of the euro zone. Currently, they are not yet a reality, but their creation is being debated since different countries and organizations take part in the decision.

What would its creation entail?

If an agreement is reached for its creation, these bonds would have a single interest rate and it would be a European central body that would issue public debt, instead of each European country issuing it on its own. This would lower the cost of funding and try to prevent speculation from being relatively easy. In this way, the risk premium would no longer be that of each country compared to German bonds, but a single one for the 17 countries of the euro zone and would be compared with the US dollar.

Who would benefit from Eurobonds?

The countries that would benefit most from the creation of European debt bonds would be the peripheral countries of the euro zone: Greece, Portugal, Ireland, Spain and Italy, since they have the highest risk premium. With the eurobonds, the extra cost of the debt of these countries would be distributed over others, more solvent in the eyes of the markets, such as Germany or France.

Would they harm someone?

The most creditworthy eurozone countries rated AAA by risk rating agencies ( Germany, Finland, France, Holland, Austria and Luxembourg ) are the most opposed to the creation of Eurobonds, because they would not benefit at all. These countries would see increased interest when it comes to placing their debt and, in addition, it would be their economies that would support the shortcomings of the rest.

Would there be Eurobonds?

One of the proposals suggests the creation of two types of Eurobonds, to say it in some way would be "bad bonds and good bonds." The public debt issues of each Member State that were below 60% of their GDP would be guaranteed by all 17 member states and would be the so-called blue bonds . While the rest of issues of public debt, those in which the debt of a country exceeds 60% of its GDP, would be the sole responsibility of the issuing country, thus becoming red bonds . The Eurobonds would be formed by the set of blue bonds, due to the fact of having the support of all the countries of the euro zone.

What would be necessary for its creation?

In order to make these eurobonds a reality, an agreement should be reached between all the states of the euro zone, as well as the approval of the European Central Bank. At the moment, especially due to the refusal of Germany and France, the situation is complicated to agree on the creation of these European public debt bonds.

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