Understanding Eurobond (eurozone): A Comprehensive Guide

A Eurobond, also known as a European bond, is a type of bond issued in a currency other than the issuer's domestic currency. This is a key characteristic of Eurobonds, which can be denominated in any currency, including the euro.

Eurobonds are typically issued by companies or governments looking to raise capital from international investors. They offer a way for issuers to tap into a broader pool of investors and raise funds in a more efficient manner.

The first Eurobond was issued in 1963 by the European Investment Bank, marking the beginning of a new era in international capital markets. This innovation paved the way for the development of a global bond market.

Eurobonds have become a staple of international finance, with trillions of dollars worth of Eurobonds issued every year.

A Eurobond is a debt instrument denominated in a currency other than the home currency of the country or market in which it is issued.

Eurobonds are frequently grouped together by the currency in which they are denominated, such as eurodollar or Euro-yen bonds.

They're often called external bonds because they're issued in an external currency.

The "euro" in eurobond is meant to imply external, not to be confused with Eurobonds with a capital "E" that define bonds issued by the European Union and European governments.

Issuance of Eurobonds is usually handled by an international syndicate of financial institutions on behalf of the borrower, one of which may underwrite the bond, thus guaranteeing the purchase of the entire issue.

The concept of eurobonds has been around for a while, with the first one issued in 1963 by Autostrade, a company that ran Italy's national railroads, for a whopping $15 million.

The first eurobond was designed by bankers in London and was issued at Amsterdam Airport Schiphol, with the payment made in Luxembourg to reduce taxes.

This initial eurobond provided European investors with a safe, dollar-denominated investment option.

The idea of eurobonds was part of the plan for a single currency among the six founding EU members back in the 1950s.

Discussion of how eurobonds might work has occupied EU members since the 1960s.

Issuers of eurobonds can range from multinational corporations to sovereign governments and supranational organizations, offering a diverse range of investment opportunities.

The size of a single bond issuance can be well over a billion dollars, with maturities between five and 30 years, although the largest portion has a maturity of fewer than 10 years.

The European Commission proposed a solution to the financial crisis in 2011 by suggesting European bonds issued jointly by the 17 eurozone states. This would involve pooling sovereign issuance among member states and sharing revenue flows and debt-servicing costs.

The Commission presented a Green Paper on November 23, 2011, to assess the feasibility of common issuance of sovereign bonds among eurozone member states. This was a significant step towards addressing the financial crisis.

The plan was to introduce Eurobonds step by step, starting with short-term bonds, then two-year bonds, and eventually common Eurobonds, based on a deeply integrated economic and fiscal governance framework.

In November 2011, the European Commission proposed a solution to the financial crisis, suggesting European bonds issued jointly by the 17 eurozone states.

The Commission presented a Green Paper assessing the feasibility of common issuance of sovereign bonds among the EU member states of the eurozone. This would involve pooling sovereign issuance among member states and sharing revenue flows and debt-servicing costs.

The introduction of commonly issued eurobonds would mean a significant shift from individual sovereign issuance by each EU member state.

The Commission's proposal was met with interest, and on 29 November 2012, President Jose Manuel Barroso suggested introducing Eurobonds step by step, starting with short-term bonds and two-year bonds, and later expanding to full-fledged Eurobonds.

This approach would require a deeply integrated economic and fiscal governance framework, which would be a significant undertaking.

Here's a brief overview of the key aspects of the European Commission's proposal:

The European Investment Bank is a key player in the European Commission's proposal to address the coronavirus crisis. It can issue bonds and spend the funds in each EU country in amounts proportionate to the size of each country's GDP.

The EIB would combine direct expenditure of funds with credit lines to EU countries, allowing for a targeted response to the crisis. This approach would not lead to fiscal deficits at any moment.

An increase in the EIB's capital could be agreed upon by member states to strengthen its resilience. This would enable the EIB to take on more risk and respond more effectively to the crisis.

The European Council could implement conditionality to address concerns about moral hazard. This would involve agreeing on a policy package for how the funds would be spent, and requiring national governments to approve legislation for implementation.

The EIB would disburse the money contingent on approval by national governments of the legislation. This would ensure that the funds are used effectively and responsibly.

A joint fiscal response under common conditions would be essential for a rapid recovery after the crisis is over.

Eurobonds are a new financing mechanism being considered to underpin European institutions and integration. This concept has gained momentum in recent times, with the European Stability Mechanism (ESM) already issuing eurobonds to finance rescue packages for countries like Greece and Spain.

The ESM has a fund of €410 billion, which is 3.4% of eurozone GDP, to be lent to euro-area members in amounts up to 2% of their GDP. However, this comes with a Precautionary Conditioned Credit Line, which requires a memorandum of understanding (MoU) between the ESM and the debt-incurring country.

MoUs have a stigma associated with them, as seen during the 2010-12 crisis. Several countries, including Italy, have already announced that they would refuse to sign another MoU this time around. This has led to a proposal for a collective agreement for all eurozone countries, with an anti-austerity MoU available to all.

There are three broad approaches to eurobonds, as listed in the green paper. These approaches differ in the degree of substitution of national issuance and the nature of the underlying guarantee.

Here are the three approaches in more detail:

Each of these approaches has its pros and cons, with some requiring significant treaty changes. The European Commission has stated that full eurobonds with joint liability could have strong potential positive effects on stability and integration, but it also poses a risk of moral hazard.

Eurobonds can offer safe and liquid investment opportunities, potentially alleviating the current sovereign debt crisis in the eurozone. This could benefit high-yield member states, making the eurozone financial system more resilient to future adverse shocks.

According to the European Commission, eurobonds would create new means for governments to finance their debt, offering a source of more robust collateral for banks and reducing their vulnerability to deteriorating credit ratings of individual member states.

Eurobonds are attractive to investors due to their global trading and favorable interest rates in certain countries, which helps attract a large investor base. For example, many U.K. residents with roots in India, Pakistan, and Bangladesh view investments in their homelands favorably.

The benefits of issuing eurobonds include reducing foreign exchange risk and transactional costs, as well as allowing companies to choose a country with an interest rate that is favorable to their own needs.

The cost of introducing eurobonds is a topic of debate among experts, with estimates ranging from 2.5 billion Euros in the first year to 20-25 billion Euros after 10 years, depending on the interest rate increase.

Corona bonds were discussed in a European Council meeting on March 26, 2020, but Germany and the Netherlands ruled out issuing such bonds.

European Central Bank head Christine Lagarde urged the EU to consider issuing corona bonds to help countries recover from the epidemic.

The European Commission and European Central Bank released billions in special funds, but some EU countries demanded more to be done in relation to the COVID-19 pandemic.

Germany, supported by Austria, the Netherlands, Finland, and Estonia, was a strong opponent of eurobonds.

Italian Prime Minister Giuseppe Conte questioned the effectiveness of the European Stability Mechanism (ESM) in facing the crisis, describing it as "completely inadequate".

The European Commission chief, Ursula von der Leyen, mentioned that the EU would allocate up to 100 billion euros to the hardest hit countries, starting from Italy.

The main opposition to the plan by the Commission came from the so-called Frugal Four.

In July 2020, the European Council agreed to issue European sovereign bonds of 750 billion €, branded Next Generation EU, to support member states hit by the COVID-19 pandemic.

Issuing eurobonds can be a smart move for a company. By doing so, they can choose a country with an interest rate that's favorable to their own at the time of the issue, which helps reduce borrowing costs.

Companies can also issue bonds in the country of their choice and the currency of their choice. This flexibility is a major advantage, as it allows them to tailor their financing to their specific needs.

Eurobonds have a particular appeal to certain investor populations. For example, many U.K. residents with roots in India, Pakistan, and Bangladesh view investments in their homelands favorably.

Issuing eurobonds can also help a company reduce forex risk. This is because the bonds are traded globally, which attracts a large investor base.

By issuing eurobonds, a company can avoid the complexities and costs associated with converting currencies. This is a significant advantage, especially for companies operating in multiple countries.

Here are some key benefits of eurobonds for the issuer:

The European Commission believes that introducing eurobonds could quickly alleviate the current sovereign debt crisis by offering safe and liquid investment opportunities, potentially benefiting high-yield Member States.

This could lead to immediate effects, even if the introduction of eurobonds takes some time, as changed market expectations adapt instantly, resulting in lower average and marginal funding costs.

According to the commission, eurobonds could make the eurozone financial system more resilient to future adverse shocks and reinforce financial stability.

Eurobonds could also reduce the vulnerability of banks in the eurozone to deteriorating credit ratings of individual member states by providing them with a source of more robust collateral.

Setting a euro-area wide integrated bond market would offer a safe and liquid investment opportunity for savers and financial institutions, matching its US$ counterpart in terms of size and liquidity.

The commission believes that eurobonds would strengthen the position of the euro as an international reserve currency and foster a more balanced global financial system.

The global bond market is a massive entity, totaling over $100 trillion in outstanding debt. This staggering number gives you an idea of the sheer scale of the bond market.

A significant portion of this market, around 30%, is comprised of Eurobonds that are unregistered and trade in bearer form, making it difficult to obtain definitive numbers for this sector.

Emerging market nations are increasingly tapping into the global bond market, with governments and companies seeking to borrow from more developed markets. This trend is likely to continue as these nations look to deepen and expand their access to capital.