Eurobonds: What they could mean for forex trading

Tue, Jul 10, 2012

Financial News, Investment

For people who have been following the recent developments in the financial markets, one word that is appearing with increasing occurrence is Eurobonds.  Investors involved in forex trading are eagerly anticipating the results of continued negotiations in Europe.  Labelled by some as the last hope for Europe, Eurobonds have been championed by new French President Francois Hollande, amongst others, as the solution to the stuttering growth and contractions seen in Europe’s economies, which in turn has devalued the Euro currency.

Either scenario of Eurobonds coming into fruition or not is likely to have an impact on the Euro and forex trading in general.

What are Eurobonds?

In this context, a Eurobond would act in the same way as any other bond.  A bond is basically an IOU. An investor buys a level of debt and then the government promises to pay a fixed rate of interest over a specific period.

The difference is, in terms of Eurobonds, that instead of a single European government guaranteeing the debt it would be all 17 member states in the Eurozone.

What is the desired effect?

The idea is that Eurobonds would ‘level the playing field’, so to speak.  During the financial crisis, southern European countries, principally Greece, have seen investors abandon plans to buy Greek bonds.  That has made Greece’s, and similarly Ireland’s and Portugal’s, ability to borrow very expensive, partly contributing to the financial situation that they now find themselves in.  Supporters of Eurobonds believe that introducing the measure will encourage investors to take on the debt of these countries, as their return of investment is assured by the collective Eurozone members, which in turn would allow Greece to borrow at a more affordable rate.  With this renewed ability, Greece and other countries in a similar situation would be able to stimulate growth within their countries, ultimately strengthening the Euro and its member states.

Who is for/against the idea?

Although there has been an increasing number of economists and politicians calling for Eurobonds, Francois Hollande has led the way for the measure since his recent election.  He also appears to be finding an increasing number of people supporting him.  Mario Monti, the Italian Prime Minister, who has also seen his country’s ability to borrow become more expensive, believes Eurobonds will become a reality in the near future.

Principally on the other side of the fence is German chancellor Angela Merkel.  The chancellor has consistently and emphatically denied any chance of Eurobonds being adopted, in the belief that it is the exact same kind of lending and spending that got the Eurozone into the situation it currently finds itself in.  Sceptics attribute her opposition to the fact that Germany has been able to borrow at extremely low rates, with a recent two-year German bond being issued with an effective interest rate of zero.

Will they become a reality? And will they work?

Many questions about Eurobonds remain unanswered, making it is impossible to say, at this stage, whether or not they will be adopted.  Europe’s leaders came and left a Brussels summit in May with seemingly no progress made as to how the bonds would be implemented, with Germany and other Eurozone members still vehemently protesting.

While investors involved in forex trading are awaiting any developments with anticipation, they are also aware of what the current situation is doing for the Euro.  As the issue with Eurobonds and other situations, such as the Greek elections, drag on further with no resolution, forex trading in May has seen the Euro lose its strength against many of its currency pairs.  The US Dollar Index, often seen as a risk aversion indicator, is at its highest level for 22 months, indicating that the Euro crisis has worried many traders.  The question remains: will Eurobonds provide the solution?

Where can I find out more?

You can keep up with all the latest developments in forex trading and the wider financial markets with IG.  They offer in-depth market analysis and commentary throughout the day, as well as a dedicated forex focus, allowing you to always stay informed before trading for yourself.

Tom Roberts is a financial writer for IG Markets.  Visit IG today and open a free demo trading account by clicking here.

Please refer to the Product Disclosure Statement available from IG Markets. CFD forex trading can result in losses that exceed your initial deposit and you do not own or have any interest in the underlying asset.  The above information should not be interpreted as financial advice.

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