Germany Shoots Down Latest Eurobond Proposal

German Chancellor Angela Merkel on Wednesday resisted calls to introduce bonds issued jointly by all eurozone member states. The so-called eurobonds would likely drive down borrowing costs for troubled eurozone members like Greece, Italy and Spain but if that were to happen, logic dictates that borrowing costs for countries like Germany would rise. European Commission president Jose Manuel Barroso believes that eurobonds would be an effective way to reduce borrowing costs and would restore faith in the ability of all eurozone members to pay their debts. However, the Germans are concerned that eurobonds would simply raise the borrowing costs of financially healthy eurozone members, while removing incentives for troubled countries like Greece and Italy from sticking with reforms that are needed to reduce their fiscal deficits. In the long run, the eurozone could find itself in a similar position that is now but without a financially strong Germany their to bail it out. Many opponents of eurobonds aren't totally opposed to the idea of jointly issued eurobonds but they feel that now is not the right time for them. They feel that countries like Spain and Italy need to enact austerity measures that bring spending under control and lower their deficits before eurobonds are considered an option. Once these deficits began to fall and the financial markets saw that the countries were serious about their reforms, eurobonds could used as one of the final tools used to drive down borrowing costs. While the introduction of eurobonds could be welcomed by the financial markets initially, they could lead to an even worse financial crisis further down the road. Each country in the eurozone would have to worry less about its own debts and more about the borrowing of others. It's not inconceivable that a country that saw further financial difficulties on the horizon could try to increase borrowing before others did the same. In times of recession, eurobonds could actually see countries racing to become the next Greece.

Traders who believe that German Chancellor Angela Merkel will be successful in resisting the introduction of eurobonds might want to consider the following trades:

Traders who believe that Europe is running out of options to prevent a financial collapse may consider an alternate position: