Amid incessant market calls for debt mutualization as the eurozone's only saving grace, Credit Suisse lays its cards on the table:
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“At this point, we believe Eurobonds are virtually impossible.”
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Merkel has been under unprecedented pressure from fellow European leaders. Even if the lady is for turning, convincing the German public is another matter:
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"In our opinion, the market is focusing too much on Merkel and hence underestimates the risks that arise from a legal as well as the electorate’s point of view."
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Ignoring the other players in Germany - particularly the constitutional court - would be a foolish move, the bank argues. The court has already requested that the president delay signing of the ESM law, and SocGen is predicting that the court will spend at least a few weeks studying the law and the complaints against it.
Merkel must also be careful not to stray too far from the wishes of the electorate. In Germany, even the ESM is seen by its critics as a continuation of failed crisis-fighting measures.
Credit Suisse is clear that - in its view - the introduction of eurobonds is practically impossible, and would be counter-productive in the near-term:
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"Based on the above, and in the status quo, we hence find the probability of an introduction of genuine Eurobonds to be virtually zero. Contrary to voices that deem them the ultimate solution to the crisis, we consider a scenario highly detrimental in which these were introduced before the democratically legitimized transfer of sufficient fiscal authority to the EU. Without that loss of sovereignty, we believe moral hazard would continue, as lower yields for peripheral government bonds would de-incentivise fiscal prudence. The result would likely be a short-term rally, but in the longer term the euro’s survival would be severely challenged. Or, as former chief economist of the ECB, Prof Otmar Issing, extremely put it, “Euro-bonds are the death of the currency union”.
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Ouch.