Euro Bonds - The Get Out of Bail Free Card

The phrase 'contagion' or 'contamination,' has driven market sentiment over the course of the year, with those in the driving seat keeping a very close eye on what some speculators believe has already occurred. The theory logically states, when crisis breaks out in one country's bond or equity markets, the trouble is likely to spread to others. Such is the nature of global economic integration in the 21st Century, markets are no longer solely exposed to their own domestic economies but also others around the world. Of course, when a string of debt-ridden countries share a unanimous currency, the threat becomes considerably leveraged.

Apprehension starts with Greece, Ireland and Portugal, three nations which have required monetary assistance from the ECB over the past 2 years. At this stage the banks come into the picture and could arguably be described as the core vehicle through which the 'disease' spreads. This is due to unfavourable positions taken in sovereign debt across euro zone nations, thus, when countries start to struggle with their payments, its the banks who lose out.

I jump now, to today. I believe August priced in a great deal of what is no longer contagion threat, rather reality. The debt crisis has quickly spread, as feared, from the source to Italy and Spain (the Eurozone's third and fourth largest economies respectively). While it was possible to calm markets with the promise of throwing more money at peripheral EU countries in order to 'solve the problem,' the same cannot be said for Italy and Spain. Therefore, we're faced with a situation where the clock is ticking - the debt crisis across Europe worsens by the hour and the up-until now solution to this problem, lacks fire power against a debt mountain.

Like other speculators, I believe the Euro Bond is the only effective solution. A Euro Bond would serve as a 'joint and several liability bond,' effectively resulting in financially more robust nations (such as Germany and France), vouching for their penny-less counter-parts; Greece and the other trouble makers.

Sarkozy remains typically impartial, so the resistance lies with Merkel. It's obvious as to why this is; Germany, the Euro Zone power house, would have to sacrifice her prized AAA rated sovereign debt, which at present yields c.1.9% on 10yr bunds. This maybe understandable, but it seems to me that the Germans are forking out anyway in this scenario. Either they are forced into offering direct, monetary aid to peripheral nations or their cost of borrowing grows. Unfortunately, I'm not in a position to comment on which one would likely cost the country more. S&P have indicated a Euro Bond would take the rating of the lowest participant, which wouldn't bode too well for the likely yield, but I still believe this is likely to be less than the estimated €2tn required to bail out Italy.

Looking further beyond merely Germany and France, a decision to implement such a security would also do wonders for global financial sentiment and give struggling nations such as Greece (who must currently offer c.20% on their 10 year yield - a figure impossible to finance) an outside chance at sustainable recovery.

In my view, this will have to happen to advert catastrophe. European politicians must be aware of this, and the risks associated with non-action.