Ireland should stand on its own two feet

As far as the European Union is concerned, it’s still 2010. If ever there was evidence that officials haven’t got the message that the crisis is over, you need look no further than Ireland.
The European Union issued a 2.4 billion-euro ($3 billion) seven-year bond, and the funds will refinance some of Ireland’s bailout borrowings. As is always the case with such securities, all 28 EU members are liable for this debt obligation. The transaction, which may price today, went swimmingly, with the order book more than double the amount available for sale, as there’s plenty of demand for AAA-rated multi-sovereign credits.
On one level, this makes perfect sense. Ireland is taking cheap financing while it can, not least because it has to repay 3.4 billion euros to the European Financial Stability Mechanism in April.
On the other, broader level, this is absolutely ridiculous. Ireland is no longer in crisis, and it exited the bailout mechanism over four years ago. Real GDP growth is more than 10 percent. Its financial redemption is perfectly illustrated by the four billion euros of five-year bonds it issued in October, which offered the princely yield of precisely zero. While Ireland is perfectly within its rights, under the terms of the 2013 Eurogroup bailout, to avail itself of this channel for raising capital, that it’s still allowed to put its sister countries on the hook for its debt obligations shows there’s still some serious dysfunction at the heart of EU financing.
And, as ever, the affair hints at a broader problem. The European Union has been issuing these securities pretty much since the euro came into existence, but the sales really hit their stride when the debt crisis hit. Collectively the EU and related organizations such as the European Financial Stability Facility have shared responsibility for at least 350 billion euros of outstanding debt.
That member countries are ‘jointly and severally’ liable for this sounds an awful lot like the EU has in place a coordinated mechanism for accessing debt markets. In other words, the securities being marketed today are Eurobonds in all but name — they’re issued through a program that has a limited size and a specific purpose linked to crisis finance, and aren’t the result of a permanent program of collective issuance whose size and indeterminate and whose purpose is to replace existing government programs. And that’s really the only difference.
Calling something a “Eurobond” is a loaded label. Arguments for and against creating joint securities for the region have been around for years. Philip Lane, governor of the Central Bank of Ireland, fired the latest salvo on Monday, with a report on the merits of pooling euro-area bonds. He published the blueprint in his capacity as the leader of the European Systemic Risk Board’s task force on safe assets. Cue outrage from Germany, the lodestar for objection to coordinated fund raising.
However, Ireland’s new bond should remind Angela Merkel that Germany’s pushback hasn’t been entirely successful. Once she finds her political feet with a new coalition government, she should do everything in her power to keep joint liability from getting further entrenched in the fabric of EU financing. Otherwise, when the next crisis hits, the German taxpayer will really be on the hook. And that might break Europe apart.

— Bloomberg

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.