Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Cancel Anytime
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

The Greek national flag and the EU flag are pictured at the Greek embassy to Germany in Berlin's Mitte district November 2, 2011.

TOBIAS SCHWARZ

Euro bonds look like such a pleasant panacea. Overstretched sovereign borrowers in the periphery would love them, of course, but they might appeal to fixed income investors too – at least superficially. Nasty Greek and Greek-like risks might be diffused and yields might be more generous. Thomson Reuters data show that today's GDP-weighted amalgam yield on 10-year euro zone bonds is about 4 per cent. That's more than double the yield on U.K. gilts, U.S. Treasuries and German bunds.

Of course, no such bonds exist yet, and their structure is highly uncertain. But whatever their final form, potential buyers are likely to have doubts. Unless the euro zone suddenly becomes more unified, the euro bonds, unlike U.S. Treasuries and British gilts, would not have the backing of a single clear sovereign government. The risks of weaker euro zone members causing a value-destroying crisis would remain and the euro bond contracts would probably be complicated. Investors will hope that Berlin and its hard money stands behind the regional paper, but that will be more of a hope than a certainty. In practice they'll hardly know what policies they are buying into.

Ironically, investors could suffer if the euro bonds work too well. Suppose they do what they are supposed to – cure the single currency's funding problem and spur a new round of economic growth. In a healthier economic environment, inflation might be higher and investors would be less desperate for the safety of solid sovereigns. Bond yields could rise. A return to the average pre-euro GDP-weighted yield in the 10 years up to 1999 would take the 10-year yield to 7 per cent, Thomson Reuters data show. But even a rise from 4 to 5 per cent translates into an 8 per cent loss of capital value.

Story continues below advertisement

Public debate about euro bonds tends to focus whether new fangled euro bonds can be made to work – politically and economically – for issuers. For the moment the skeptics have the upper hand. If those doubts are overcome, there will also be some skeptical investors to persuade.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies