core sector communique

Eurobills: a First Step Towards Eurobonds, But 

Investors Wary of Moral Hazard

CFA Institute poll gauges sentiment of EU and Swiss member

London, United Kingdom, 11 September 2012

As the European Central Bank and the European Commission get ready to put forward bolder measures to tackle the sovereign debt crisis, CFA Institute polled its EU and Swiss members on the viability of eurobills. The surveyshows that investment professionals hold strong views on the role of eurobills, their potential impact on the financing costs of member states, and the necessary guarantees and conditionality that will better protect investors.

As short term debt, eurobills are viewed by some European leaders as a first step in a “roadmap” which would enable the eurozone to move towards the common issuance of longer term eurobonds while establishing the necessary safeguards and governance framework.

Nitin Mehta, CFA, managing director of CFA Institute for Europe, the Middle East and Africa, commented: “79% of investment professionals polled believe eurobills would be a pertinent first step towards longer term eurobonds. Eurobills would also have, on average, a positive impact on short term financing costs of member states. However, an overwhelming 82% said that conditionality should be associated with eurobills to manage the risk of moral hazard, where some member states may follow poor budgetary discipline with limited implications for their financing costs, and keep the yield of eurobills low.  A possibility would be to limit the access of a participating member state to eurobills in case of non-compliance with rules and recommendations under a euro-area governance framework.”

The poll was sent to 16,496 members, of which 949 responded, a 6% response rate.  The key findings are listed below:

• The potential role of eurobills: The majority of respondents think that eurobills would be a pertinent first step towards the issuance of longer-term bonds (79%), would facilitate the transmission of euro monetary policy (58%), would help alleviate the current sovereign debt crisis (52%), and would reinforce financial stability in the euro area (50%). However many respondents underline that any commonly issued debt will not cure the structural issues of lack of growth, public deficits and imbalances in competitiveness of many member states.
• 74% of respondents said that in order for eurobills to be effective, they would need to have a joint and several guarantee, under which each member state would be liable for its share of liabilities as well as the share of any other member state failing to honour its obligations.
• 63% believe that, on average, eurobills would bear a lower yield than the average yield of nationally issued bills.

Nitin Mehta, CFA, continued: “This survey provides a snapshot of the opinions of our members. If eurobills become a reality, their success will hinge on the attitude of investors. We therefore think this survey gives insight to EU leaders and regulators into the concerns of investment professionals, how they assess their potential impact and what they think is desirable in terms of structure. We will be feeding our results into the work of EU institutions, building upon our previous members’ poll informing our response to the European Commission’s public consultation on introducing long-term eurobonds.”

CFA Institute

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has more than 113,000 members in 140 countries and territories, including 102,000 CFA charterholders, and 137 member societies. For more information, visit www.cfainstitute.org.