The EU Should Issue Perpetual Bonds?

[Lucius]

After it was announced that the EU would need around €1 trillion to successfully tackle the crisis caused by the COVID-19 virus pandemic, the idea arose that this money could be raised by issuing perpetual bonds.

A perpetual bond, also known as a "consol bond" or "prep," is a fixed income security with no maturity date. This type of bond is often considered a type of equity, rather than debt. One major drawback to these types of bonds is that they are not redeemable. However, the major benefit of them is that they pay a steady stream of interest payments forever.

Such funding has not been used in the EU so far, and has historically been used by the UK to fund the Napoleonic Wars and the World War I. Interestingly, these bonds were active until 2015.

Although, according to what one can read, most members do not express a positive opinion about this type of financing for the time being, it is indisputable that this would be an almost ideal way to raise money. An example of such bonds worth €1 trillion with 0.5% annual interest would cost the EU only €5 billion, which is less than 3% of the annual budget for 2020. I'm not an economic expert, but this seems to me to be a much better solution than printing money that we are witnessing especially in the USA.

https://www.project-syndicate.org/commentary/finance-european-union-recovery-with-perpetual-bonds-by-george-soros-2020-04

[mu_enrico]

Long term and perpetuity bonds were more appealing to the governments, not to the investors. It is perhaps because of the stock market outperforms the bond market for the past 20 years. And inflation made the coupons basically worthless after tens of years.

Ok with the perpetuity formula, investors can calculate the present value easily and determine the desired price for it. Let's say investors like it and buy it. If things then get desirable for the government, they will let it rust, and conversely, if things become unfavorable, they will call the bond.

Yep, it is more transparent than OMO, but the market may not be able to absorb it.

[Hydrogen]

Russia, china, japan and other nations of the world sold off US bonds as america's deficit grew larger. The federal reserve is credited with being the largest holder of US bonds today. Central banks have scrambled over the last 10+ years to repatriate native gold reserves held in trust within the vaults of foreign nations. These events illustrate bond and fiat markets becoming less reliable and robust over time, as deficits grow with increasingly larger mountains of fiat being printed.

Bonds and fiat both being issued by the state, they're dependent upon the credit and balance sheet of governments being solvent. A heavily centralized abstraction with a single point of failure: state budgeting.

An optimal solution may be one of decentralization. Decoupling wealth, finance and economies from the state. In order to isolate wealth and standard of living from hyperinflation and unwanted conditions, in the event of catastrophic failure.

A return to some form of gold backed currency or precious metals would help to mitigate mass destruction of wealth triggered by governments defaulting. Utilizing bitcoin and other cryptocurrencies which are isolated to a degree from the policy making and bureaucracy of governments, could be good policy given market conditions.

Hopefully we'll also witness a decline in crypto trading resembling wallstreet in the post halving era. A return to bitcoin's HODL market mechanics roots would be epic.

[jackg]

Such funding has not been used in the EU so far, and has historically been used by the UK to fund the Napoleonic Wars and the World War I. Interestingly, these bonds were active until 2015.

The oldest one of these I've seen is probably this: https://news.yale.edu/2015/09/22/living-artifact-dutch-golden-age-yale-s-367-year-old-water-bond-still-pays-interest

I saw a video on it a while ago and it is still paying interest (probably 12 years of interest is one water bill so by now it's more a historical artifact than anything).

Long term and perpetuity bonds were more appealing to the governments, not to the investors. It is perhaps because of the stock market outperforms the bond market for the past 20 years. And inflation made the coupons basically worthless after tens of years.

Stock investments are risky and with interest rates of banks being almost zero this may seem desirable - espeically for people who can't afford real estate investments - but it is quite string they haven't tried to offer 2% or higher to make it have an incentive.

Since there are about 12.5 trillion euros in circulation, if there's a 1.7%+ inflation rate then offering 2-3% wouldn't cost too much and might be more lucrative than what is currently on offer.

There is the chance that these bonds will end up being sold really cheaply in a few years but people might buy them as a hedge against any sort of assets to try to save current profits better. A lot's happened in the past 20 years, it might not continue to outpreform bonds.

[countryfree]

Sure, they can issue them, but only very, very cautious investors would buy them.
I certainly wouldn't want to touch them. ROI would be ridiculous.

[silversurfer1958]

I think the idea of European permanent bond issuance aimed at restoring the economy caused by the COVID-19 pandemic is a great idea. This helps the Euro currency not weaken much compared to the way of printing money as much as the United States currently implemented. I think there will be big investment funds in the world that will buy many European bonds issued because Europe is a strong economy of the world.

[pugman]

The idea seems really good in theory, but one trillion dollars is a large sum of money, and giving it at a 0.5% annual interest would do no good for investors. I mean when stock markets and crypto markets exist, investors are less interested in bonds.

Although the stock market is in shambles right now, there needs to be some sort of non-financial benefit/a good enough interest rate if indeed the EU is desperate for money.

Also this fully does not have be Perpetual bonds, there could different types. Municipal Bonds could really do well if the whole thing is thought out well ^[1].

^[1]https://www.buschinvestments.com/Types-of-Bonds.c71.htm

[leyton11]

This is also a good idea and it is always better than printing money. Money printing will create inflation but no debt. For the issuance of bonds, the government will be in debt and pay interest for it. both of the above will affect the economy, but for bond issuance, it will only be affected in the short term. But I think they should only issue medium-term bonds, once the epidemic is under control and that will be the time when they pay their debts and don't make interest rates cause too much budget deficits.

[cosmofly]

It is a good idea to issue bonds but not for a permanent term. I am afraid that the issuance of permanent bonds will cause more debt and even bad debts in the future. because we are only dealing with disease and need a lot of money right now to balance the economy. So why don't we issue bonds in the short term? When everything is settled, the economy will return to normal and then the banks will be obliged to help the economy grow further. What do you think ?

[figmentofmyass]

Sure, they can issue them, but only very, very cautious investors would buy them.
I certainly wouldn't want to touch them. ROI would be ridiculous.

the ECB will buy them via their bond purchase programs. it's just another step towards "QE infinity" though.

I'm not an economic expert, but this seems to me to be a much better solution than printing money that we are witnessing especially in the USA.

i'm no economics expert either, but my take is that QE is the only way for the market to absorb these bonds at these yields/volumes, so it's just another form of money printing.

[stompix]

The idea seems really good in theory, but one trillion dollars is a large sum of money, and giving it at a 0.5% annual interest would do no good for investors. I mean when stock markets and crypto markets exist, investors are less interested in bonds.

But they still buy German bonds at negative rates 

And Germany is also the reason why this won't happen, they have always been against bonds that would be issued for the entire EU in which countries with bad ratings would profit far more than the other ones and at the same time would affect their own bond issue.
It has been the same story during the 2007 crisis, the Greek crisis, and now with the Corona bonds.
Every time Germany with the help of either the Netherlands or Austria will veto any joint proposal.

[abhiseshakana]

Even government bonds are the safest bonds, have equity features, and may have a coupon payment suspension option but will not be able to penetrate the market. What causes pessimism is not 0.5% interest annually but there is uncertainty about the end of the pandemic. My lay understanding of the capital market, that the longer the time of maturity is the higher the risky and the higher the interest rate. The longer-term bond will fluctuate more than a short term bond.

In perpetual bonds, maturity dates are not hybrids and are hybrid instruments that have debt and equity benefits. The instrument is also of higher credit risk and usually compensates the advantages with higher coupon and other investor-friendly embedded features such as call options and step up rates as well as some incentives such as reducing even the elimination of value-added tax for buyers of these bonds.

[sheenshane]

Perpetual bonds probably a good at a single glance for it can easily balance the economy however, it's still a debt that may cause severe problems in the future if the economy fails. The reason for the economic recession is Covid19 and if this pandemic has ended rest assure economy may go back to normal as everyone will be able to do their part in recovering their losses, maybe we can find it slow at first but it will definitely recover.

Though some may accept perpetual bonds for everyone right now really need funds to cope up in this crisis and we couldn't blame our government if they will accept this because they only think that this could be immediate assistance for our economy.     

[el kaka22]

I think the problem is not really how they will find the money to recover, they will find the money one way or another and I am sure it will work out in the end without destroying the general economy.

However none of the methods are fixing the small guy, they are working too much to save the huge companies and I get that, these companies are saving thousands of jobs so they want to pay them first, but those thousands of people who work there will need money as well, there is really nothing that would save those people neither. I would like to see a method that would actually save the small guy first, I don't care where they will find the money from, they could do whatever they want, just give it to everyone equally, not the companies because that just doesn't help enough.

[exstasie]

However none of the methods are fixing the small guy, they are working too much to save the huge companies and I get that, these companies are saving thousands of jobs so they want to pay them first, but those thousands of people who work there will need money as well, there is really nothing that would save those people neither. I would like to see a method that would actually save the small guy first, I don't care where they will find the money from, they could do whatever they want, just give it to everyone equally, not the companies because that just doesn't help enough.

There are multiple reasons this happens. One is simply corruption and nepotism in favor of powerful corporations, hidden under a facade of trickle-down economics. Another is that no government has the proper infrastructure to quickly get cash to those who need relief, so they leverage the existing institutions: large corporations, banks, and bureaucratic entitlement systems like unemployment.

So to use the US as an example: middle class homeowners are mostly in a very cushy position right now. they get to defer mortgage payments for a year (no housing costs at all) and they are either working from home or getting $2,400/month extra on top of regular unemployment checks. The pandemic is working out fantastically for lots of people.

Meanwhile everybody in the informal economy, most self-employed workers, and renters (typically lower income demographics) have been completely forgotten. This will have repercussions for the economy.

[Lucius]

i'm no economics expert either, but my take is that QE is the only way for the market to absorb these bonds at these yields/volumes, so it's just another form of money printing.

Quantitative easing (QE) in this case would mean that the European Central Bank (ECB) would through its bond purchase program buying this bonds, in other words, instead of printing money directly and pumping it into the EU economy, perpetual bonds would be some sort of mitigating mechanism that would have less detrimental effects, at least in the short term. It is true as is stated in article that market can not absorb such huge amount of money at once, which would be resolved by "raise this amount in installments".

But they still buy German bonds at negative rates 

However, these are normal bonds with negative rates, but as far as I know, they are traded at premium prices. I read somewhere that their premium price reached as high as 6%, which explains why in a very short time the amount of $5 trillion in investments in such bonds jumped to as much as $15 trillion.

And Germany is also the reason why this won't happen, they have always been against bonds that would be issued for the entire EU in which countries with bad ratings would profit far more than the other ones and at the same time would affect their own bond issue.
It has been the same story during the 2007 crisis, the Greek crisis, and now with the Corona bonds.
Every time Germany with the help of either the Netherlands or Austria will veto any joint proposal.

Unfortunately, the EU works in a way that nothing can be done without Germany and a few of its close allies. The perpetual bond proposal was supported by Spain (as far as I know), but since the idea originated from the kitchen of George Soros, perhaps it is not a matter of the idea itself, but of who is behind it.


What may be important to emphasize is that the proponents of this idea believe that it should be implemented as soon as possible, because later it would actually be counterproductive.

The financing arrangement for Perpetual Eurobonds should be enacted immediately. Postponing it would be counterproductive, for two reasons. First, because an immediate response would be much more effective in preventing economic collapse. Second, because it is now clear that all countries have been hit by a common exogenous shock; in one or two years, there will be more recriminations about moral hazard and policy mistakes, and a coordinated response would be politically even more difficult.

We are living through a critical historical juncture. If mismanaged, the looming economic crisis would disrupt the European project, with far-reaching political implications. The alternative to a bold coordinated response is to continue to bend the existing institutional framework with ad hoc adjustments that undermine its long run credibility, until it will eventually break

[FanEagle]

Bonds are not there because of the interest, it is there so that people could put their money into stuff that will not go away or drop. You can't really just put 2 billion dollars in savings or something, that doesn't happen at all, you put 2 billion dollars into bonds and you get low interest but at least you can hold it for huge mass amounts.

You think some huge company buys another company for 2 billion dollars actually pays 2 billion dollars in cash or something? You think they just wire them 2 billion dollars? They send them the bonds, that is how the huge amount of exchanges happen. Or they basically get low interest loans against their 2 billion and instead keep the bonds and pay the loan with the bonds slowly instead to not break up the bonds.

[Gozie51]

Bonds are ways that government generate money to run the system. Bond is different from tax, tax in itself is a charge by the government on individuals or companies but bond is a kind of of partnership. My worry to this is if perpetual is going to be a long time because that means does who are able to buy now would keep getting money from their investment with the government and others might not have such opportunity too.

[stompix]

~

Unfortunately, the EU works in a way that nothing can be done without Germany and a few of its close allies. The perpetual bond proposal was supported by Spain (as far as I know), but since the idea originated from the kitchen of George Soros, perhaps it is not a matter of the idea itself, but of who is behind it.

The idea was indeed supported by Spain and at least at one point by Italy but you need total consensus for it to happen, any country in the Eurozone that decides against it will bring down the project, not necessarily Germany but Finland or Belgium or Portugal. And I'm pretty sure Irland will join the veto vote as they are backtracking on the bond issue quite fast, from signing every bond proposal to now not wanting anything to do with it. The latest news is pretty much killing the idea of the bonds, the court decision in Germany and the latest decision to go for a syndicated bond when nobody expected it, and although the results were not quite what they've wanted it was still a way better deal than any other country could get till 3 points better than Italy when it comes to this.

As for the "who" behind the paper...nobody gives a damn about Soros.
He is just the usual culprit when you have nobody to blame but yourself, "Soros did it!!!", when you have protesters in the street "Paid by Soros" and so on and on
In reality, nobody cares about a 90 years old man whos chances of seeing even the end of the pandemic are pretty slim.

[Hydrogen]

i'm no economics expert either, but my take is that QE is the only way for the market to absorb these bonds at these yields/volumes, so it's just another form of money printing.

I see experts spamming fake news everywhere on this forum.

They avoid basic truths such as bonds being as vulnerable to a default as fiat.

The perpetual bond proposal was supported by Spain (as far as I know), but since the idea originated from the kitchen of George Soros, perhaps it is not a matter of the idea itself, but of who is behind it.

There's a conspiracy theory that says ruling elites like George Soros intend to crash the global economy to create an excuse for a global reset. Under which time they intend to impose their New World Order.

Issuing bonds as Soros proposes creates a single point of failure. Which would make it easier to topple global economies. As opposed to more diversified arrangements which could make the task more difficult.