By John Paulson
The European sovereign credit markets are in a danger zone. Italy and Spain need to borrow a combined €590bn in 2012, their yields remain above sustainable levels, and the European Central Bank’s efforts at buying debt in the secondary markets have so far been ineffective in holding yields down.
Drawing on our experience restructuring companies along with lessons learned in the US following the bankruptcy of Lehman Brothers, we suggest the ECB consider a sovereign debt guarantee programme as a solution to the European sovereign debt crisis. Such a scheme would be similar to the successful Temporary Liquidity Guarantee Program adopted by the US’s Federal Deposit Insurance Corp to stem the financial crisis after the failure of Lehman by enabling financial institutions to refinance their maturing debt and avoid a default.
It is clear that existing, piecemeal efforts by European leaders have been ineffective. Even after the ECB bought €208bn of European debt, Greece, Portugal and Ireland all still required bail-outs. Italian and Spanish yields, meanwhile, remain stubbornly high. The European Financial Stability Facility, the eurozone rescue fund, is proving impractical – the recent sale of €3bn of bonds met only tepid demand, casting doubt on its ability to raise its full €440bn target, never mind the €1tn needed for the credit enhancement insurance scheme. A €200bn capital boost to the International Monetary Fund was a step in the right direction, but the amount is still not sufficient to alleviate market concerns. Direct purchases of new issues of sovereign debt by the ECB have been ruled out owing to their potential inflationary effects.