The euro-denominated sovereign bond market is a mess. Since the birth of the single currency, investors have treated this €7,300bn behemoth as a homogenous, highly rated entity. They merrily drove spreads down as if there were no material difference in the creditworthiness of Germany and Greece. Yet the underlying economies were diverging. The reversal of spreads recently looks like a belated acceptance that the punt on convergence was a mistake.
The eurozone is a multi-tiered economy and a multi-tiered sovereign bond market. The challenge is to reduce the impact of diverging creditworthiness among its 16 sovereign issuers on borrowing costs.
Bruegel, a think-tank, suggests an answer. It argues the 16 should pool their national debt up to 60 per cent of gross domestic product, creating a core market of “blue” bonds that would attract a triple A rating because of its size and liquidity, and by making all members liable for each other's debt. Borrowing beyond the 60 per cent threshold would be on a national basis.