The European Primary Dealers Association (EPDA), an affiliate of the Securities Industry and Financial Markets Association (SIFMA), today released a significant research report titled A Common European Bond that is based on a survey of primary dealers’ views on the pricing of possible European common debt instruments, including qualitative analysis.
The paper contributes market perspective and research to the debate on common European T Bills and Bonds that to date has focused on the political and legal obstacles of the pooling of debt by euro area Member States.
“During the past year we have seen a flight to quality in the government bond market and a widening of spreads between issuers. “This year is the 10th anniversary of European Economic and Monetary Union, so it is a good time to ask whether fuller bond market integration could bring benefits for the market as a whole and more specifically, the European taxpayer”, said EPDA managing director Mark Austen.
The survey found that some structures for a common European Government bond have the potential to reduce borrowing costs and to support the euro's bid as an international reserve currency.
The EPDA asked its member banks, comprising primary dealers in European Government bond markets, to price six theoretical instruments that were differentiated according to the number of participating issuers, total annual issuance volume, and credit rating. The two favoured options to emerge from the EPDA survey were a six month euro area Treasury Bill comprising all 15 euro sovereign issuers and a bond issued jointly by a group of six smaller AAA-rated issuers.
The EPDA recommends that more work would be needed to further define these structures before it could be determined that the benefits definitely outweighed the risks or costs. Austen noted, “We are a long way from recommending a common bond in any format at this stage but we hope this work gives others pause to reflect on which possible structures may ultimately bring benefits to the European taxpayer”.
“A common T Bill would be a reasonably modest starting point with very limited risk that could rival US Treasury Bills for size and liquidity, said EPDA co-chair Paul Spurin. “Alternatively, if some of the smaller issuers grouped together, then they may be able to reduce the liquidity premium they pay for their debt”, according to Mr. Spurin.
When survey participants were asked about their product preference, they favoured a simple structure that would be easily understood by investors rather than more complicated structures such as those which included a “guarantee fund” to ensure that upcoming payments were satisfied.
“Dealers recognise that investors would need to be comfortable with the product,” said EPDA co-chair Christophe Rivoire, Global Head of Euro Rates Products at HSBC. “Both the T Bill and a bond issued by a smaller group of AAA-rated issuers are simpler and more palatable options that warrant further study”.
The organisation contends that there is a strong case for examining more closely a common T Bill or a common issuance of small to medium sized issuers to determine whether potential benefits can be realised for the European market. Additionally, both the buy and sell sides should be involved at key stages in the process.
