Make way for Trichet bonds

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by Roy C. Smith

Difficulty in resolving the debt problems of its weaker states is edging the eurozone ever closer to the brink. Even after the announcement last May of an EU/IMF €750bn sovereign loan support programme, together with appropriate budget-tightening efforts, Greek bonds still trade at around record levels over German bunds of 895 basis points, with Ireland (565) and Portugal (425).

One reason may be that too many investors see the EU as just papering over the problems, while the difficulties with the Germans may be greater than meet the eye.

Upset over the apparent violation of the no-bailout provisions of the Maastricht Treaty, and under strong political pressure, Germany might declare the sovereign support plan to be unconstitutional, forcing it out of the deal and sending everything over the cliff.

Germany does not want to spoil everything, of course, so chancellor Angela Merkel has sought to persuade European leaders to create a new permanent debt resolution treaty to handle eurozone countries with too much debt. We know how hard this is to do from the recent American experience in trying to create an "orderly resolution" process for troubled banks. The task of writing a workable new treaty that 27 sovereign countries would sign is far more difficult; perhaps impossible.

What is needed instead is a market-based solution to reduce the amount of sovereign debt among the weaker eurozone countries and to ease investor concerns. Such a solution necessarily involves restructuring existing debt through an exchange of old debt for new, lower-cost, longer-maturity bonds.

Read the full opinion editorial on EFinancialNews.com.

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