Closing the AAA Ranks? Berlin Denies Rumors of Plans for Joint 'Elite Bond'

The move would divide Europe -- according to a press report, Germany and the five other strongest euro member nations are considering the issue of so-called "elite bonds." A German government official has denied the report, but there is mounting speculation that the six nations plan to spearhead closer fiscal coordination.
German Chancellor Angela Merkel and French President Nicolas Sarkozy are reported to be planning joint bonds with four other strong euro nations.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are reported to be planning joint bonds with four other strong euro nations.

Foto: Remy de la Mauviniere/ AP

German Chancellor Angela Merkel has been vehemently opposing  calls for the introduction of joint bonds  issued by all euro-zone member states to fight the ongoing currency union debt crisis. But according to a Monday report in the conservative paper Die Welt, her government has been secretly working on an alternative: the issue of so-called "elite bonds" by the six euro-zone member states that enjoy a top, AAA credit rating.

The newspaper, citing unnamed senior European Union diplomats, said Germany was considering jointly issuing bonds with France, Finland, the Netherlands, Luxembourg and Austria, and that the bonds would have yields of around 2 to 2.5 percent, slightly higher than the current yield on 10-year German government debt.

The idea has been under discussion for several weeks, and was addressed most recently last Friday in Berlin at a meeting of the finance ministers of Germany, Finland and the Netherlands, the newspaper said.

The aim of the bonds would not just be to stabilize the AAA countries but also to raise funds to aid struggling nations such as Italy and Spain, provided that those countries met strict conditions in return.

The German government's Finance Agency, which manages the issuance of German government debt, could play a central role in the plans for elite bonds, Die Welt reported. A German Finance Ministry spokesman denied the report on Monday, Reuters reported.

Last week, European Commission President José Manuel Barroso presented three possible models for euro bonds to be issued by all 17 euro-zone members, but Merkel rejected the plans. She fears they would lead to a sharp rise in German borrowing costs and argues they would reduce the pressure on highly-indebted euro-zone nations to get their finances in order.

Plans Would Divide Euro Zone

The elite bond plans are reportedly part of a German government concept for a currency union treaty under which only a few euro-zone member states would initially agree to stricter budget rules and stronger fiscal coordination. If realized, the concept would enshrine widening divisions among the euro-zone nations in the debt crisis.

According to the tabloid Bild, there are German-French plans for a new euro treaty among the strongest countries of the euro-zone which is to be implemented quickly through bilateral agreements that would allow it to be in place by the start of 2012. German government sources have denied reports about secret talks with France about a new stability treaty. But it is clear that Merkel and French President Nicolas Sarkozy plan to submit common proposals for limited treaty changes ahead of the next EU summit on December 8 and 9.

Meanwhile, the International Monetary Fund denied a report in Italian daily La Stampa that the IMF may provide €600 billion ($802 billion) in aid to Italy, whose borrowing costs have reached record highs. Last Friday, the yield on two-year bonds rose to 7.8 percent. The new transition government under Prime Minister Mario Monti plans to regain the confidence of investors with reforms and a new austerity package.

cro -- with wire reports
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