Proposed Blue Bond Concept
The Blue Bond proposal, first published in May 2010, aimed to address the debt crisis in the eurozone by pooling up to 60% of national debt under joint and several liability as senior sovereign debt. This innovative idea, if implemented, could have significant implications for the region's fiscal responsibility and borrowing costs.
The proposal was designed to safeguard fiscal responsibility by suggesting Blue Bond allocations to member states. These allocations would then be voted on by member-state parliaments. The Blue Bond, if issued, would be a Triple A asset from an investor's perspective, thanks to the joint and several liability, which would reduce the risk of the asset.
The Blue Bond proposal aimed to achieve both higher and lower yields at the same time. By pooling one part of the debt, it would lower borrowing costs for the euro area. Meanwhile, ringfencing another part of the debt would ensure that each country's unique economic circumstances were still recognised.
The dynamics of a self-fulfilling prophecy could be at work in the eurozone, with weaker countries suffering from expanding spreads, which can in turn further weaken their fiscal outlook. The Blue Bond proposal sought to break this cycle by increasing demand for Blue Bonds from central banks and sovereign wealth funds, not least in China and other Asian countries. This increased demand would further increase the liquidity gains.
The introduction of a Blue Bond with liquidity on a par with US Treasury bonds could help to promote the more widespread use of the euro as a reserve currency. This, in turn, could reduce borrowing costs for all involved, helping to prepare the ground for the rise of the euro as an important reserve currency.
The Blue Bond scheme, if implemented, could help re-establish the credibility of the Stability and Growth Pact and reduce the risk that a bail-out of weaker countries might become necessary. Furthermore, the increased liquidity premium for the Blue Bond in times of crisis is of particular interest because it would increase the resilience in a crisis of government borrowing, not least of smaller and weaker economies.
Assuming a legacy debt stock of 60 percent of GDP, the liquidity advantage generated could amount to an average net present value of six percent of the GDP of participating countries. For a back-of-the-envelope calculation, let us cautiously assume a 30 basis-point liquidity premium over the average of participating countries. This would result in an average reduction of 10 percent in the interest burden at any point in time.
The Blue Bond proposal influenced subsequent Eurobond proposals such as European Safe Bonds (ESBies) and decisions for large-scale joint borrowing, such as in the COVID-19 economic recovery context with NextGenerationEU. Delpla and von Weizsäcker identified vulnerable eurozone countries with high debt levels as potential participants in their 2010 Blue Bond initiative, but the sources do not specify exact countries or confirm their actual participation in subsequent implementation.
In conclusion, the Blue Bond proposal offers a potential solution to the eurozone's debt crisis by pooling debt and increasing liquidity, thereby reducing borrowing costs and promoting the euro as a reserve currency. While the exact implementation and participating countries remain to be seen, the proposal's impact on the region's fiscal outlook and borrowing costs cannot be underestimated.
