Tuesday, January 20, 2009

Euro-Zone Govts To Mull Single Debt Body

(Dow Jones)--Euro-zone government debt agencies will discuss the possibility of creating a single debt agency for the region at a meeting in Brussels Jan. 28, two members of a European Union government debt committee said Monday.

A sub-committee of the European Union's Economic and Financial Committee, which is made up of government debt managers, will hear debt agencies' views on the concept at the meeting, said one member of the committee.

The sub-committee, which is known as the Thomsen Group after Jens Thomsen, a member of the board of governors of the Danish central bank, won't, however, be presented with any specific proposals by debt managers.

"It will be discussed in a general sense," said a European central banker. "It is only to hear members' views on this. There is no proposal."

The talks come at a time when the cost of borrowing money is rising sharply for most euro-zone governments as they struggle to sell an increasing amount of debt in a bid to compensate for reduced tax revenue and fund economic stimulus packages and bank capital injections.

As these governments have borrowed more money and their fiscal positions have weakened, their credit ratings have come under pressure and investors have demanded they pay a higher yield as compensation.

Investors have been most keen to buy German government bonds amid the current financial crisis because Germany is seen as the least likely to default on its debt and has the most liquid bond market which means investors can easily buy and sell its debt.

Smaller countries which are viewed as having weaker financial positions and smaller, less liquid debt markets have, however, had to pay a sharply higher cost to borrow money.

The Greek government has seen the cost of its debt rise by the greatest amount in relation to Germany over the past few weeks, with Greek 10-year yields trading 248 basis points above German yields, up from 163 basis points in early December.

The European Commission said in May last year that it wanted to revise analysis first conducted in 2000 into whether the efficiency of the euro government debt markets could be boosted by creating a single debt issuer.

E.U. Commissioner for Economic and Monetary Affairs Joaquin Almunia has been a long-standing advocate of such an agency, arguing that the euro-zone government debt market is underperforming its potential due to its fragmented nature.

Luxembourg Prime Minister and Finance Minister Jean-Claude Juncker added his voice to calls for the consideration of a single debt agency at the end of December when he said it could restore capital investment in the currency bloc.

The proposal has always faced significant challenges, however, not least from the fact that Germany and France are unlikely to support the proposal because they will have to pay a higher cost to jointly issue debt.

The European Primary Dealers Association, which represents banks transacting 85% of European government bond volumes, drew up blueprints in September last year on how some euro-zone governments could jointly issue treasury bills and bonds while avoiding some of these problems.

"This is the time to start looking at this issue and we are supportive of the idea that a body such as the commission, the ECB or the Eurogroup takes the time to explore it," said Mark Austen, managing director of the EPDA.

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