Making new flexible friends

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Making new flexible friends

At some stage, most EU countries will give up sovereignty over their own currency and will adopt the euro. So investors who have been buying European government debt will have a new decision to make: whose euro government bonds do they buy? Among the criteria will be spread margin, liquidity, flexibility and the less tangible measure: user-friendliness. Robert Minto reports.

Gilt strips take the stage


Any discussion of European government bonds turns at some point to the advent of the euro. Countries that join in the first round in 1999 lose sovereignty over their domestic currencies and the right to print money. Secondly, their debt issuance will be restricted to 3% of their GDP.

The second requirement is unlikely to make much difference to government bond markets. Most EU member countries announce their borrowing requirements for the year in advance, and in the run-up to the single currency potential participants are keeping to the borrowing limits set out by the Maastricht treaty. So the restrictions will not change total issuance much. What will be different is the currency of issue. Member governments will have to issue new debt in euros or a currency other than their old domestic one.

This is likely to create a single-currency government bond market similar in size to that of the US. (It may also incidentally create confusion over the term Eurobond - is it a government bond issued in euros, or a bond issued in a currency other than that of the country or market in which it was issued?) And it will also also force investors in European government bonds to make choices between different issuers of euro-denominated bonds.


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