Jean-Claude Juncker, President of the Euro Group and Prime Minister of Luxembourg (not to be confused with Jean-Claude Trichet, President of the ECB) hatched a plan to combine the bonds of all the Eurozone countries into one entity, saying E-bonds would end the crisis

Europe must formulate a strong and systemic response to the crisis, to send a clear message to global markets and European citizens of our political commitment to economic and monetary union, and the irreversibility of the euro.

This can be achieved by launching E-bonds, or European sovereign bonds, issued by a European Debt Agency (EDA) as successor to the current European Financial Stability Facility. Time is of the essence. The European Council could move as early as this month to create such an agency, with a mandate gradually to reach an amount of outstanding paper equivalent to 40 per cent of the gross domestic product of the European Union and of each member state.

Subprime Bundling is No Solution

Junker’s plan is much like the idea of taking subprime loans bundling them together with AA and A loans, putting the mess into one package and stamping the whole thing AAA on the misguided notion (lie) that bundling would make everything safe.

With Junker’s plan, higher rated countries like Germany and France would see their borrowing costs rise, while Ireland, Portugal, and Spain would see their borrowing costs dramatically lower.

Meanwhile as with subprime housing loans, the underlying rot would still be eating away at the core.

Germany Rejects Junker’s Idea

Almost immediately Germany Snubs Pleas to Boost Aid, Sell Joint Bonds

Germany rejected calls to increase the European Union’s 750 billion-euro ($1 trillion) aid fund or introduce joint bond sales, signaling its refusal to bear extra costs to stamp out the debt crisis.

With European finance ministers gathered in Brussels today for their monthly meeting, German Chancellor Angela Merkel rebuffed pleas from Belgium and central bankers to boost the emergency fund to save countries such as Portugal and Spain from falling prey to speculation.

“Right now I see no need to expand the fund,” Merkel told reporters in Berlin. She said EU treaties bar joint bond sales, which might force up Germany’s borrowing costs, the lowest in the euro area.

France Rejects Junker’s Idea

Junker’s idea is now officially dead as French Back German Rejection of More Aid

German government bonds climbed, snapping a two-day drop, as France backed Germany in refusing to add to the European Union’s 440 billion-euro ($581 billion) rescue fund and rejecting joint euro-area debt securities.

The gains sent 30-year German yields down from the highest in almost seven months. Dutch and Belgian bonds also rose as European Central Bank Governing Council member Nout Wellink yesterday said he doesn’t favor joint bond issuance for the euro region, while the ECB today said emergency liquidity measures will stay “as long as necessary.” Irish bonds were little changed after Fitch Ratings downgraded the nation’s credit.

France backs Germany’s resistance to increasing the size of the European Union bailout fund and to joint euro-area bonds, a French official told reporters today.

Euro bonds are an “implicit transfer of money to other countries,” Wellink, the Dutch central bank chief, told reporters in Frankfurt yesterday. Creating euro bonds would be “a very intransparent way of burden sharing,” he said.

Goldman Sachs, no doubt seeking to peddle more securities, supports the idea of E-Bonds.

Regardless, the idea is dead in the water and neither the ECB nor the EU has addressed what will happen sooner or later: one or more of the group of PIGS, Portugal, Ireland, Greece, Spain will default.

The only solution is a haircut for senior bond-holders and no one but German Chancellor Angela Merkel has been willing to even discuss that idea. Unfortunately, Merkel backed down from that idea under pressure from Jean-Claude Trichet and the ECB.

It may not take long before Irish, Greek, Portuguese, and Spanish yields soar back to new highs given the underlying stress still mounts.

Mike “Mish” Shedlock
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