by Peter Franklin
Wednesday, 22
April 2020
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16:31

Will a desperate EU resort to ‘perpetual bonds’?

Financier George Soros makes a far-fetched proposal...
by Peter Franklin
George Soros argues that the EU needs a trillion euro Recovery Fund

On Monday, I argued that governments are poised to finance the enormous debts they’re racking up by monetising them. Central banks will create money out of nothing and use it to buy up bonds issued by their respective governments. One part of the state will therefore borrow made-up money from another part.

If you think that sounds sounds far-fetched then read this piece for Project Syndicate by George Soros. The financier and philanthropist argues that the EU needs a trillion euro Recovery Fund. The really interesting bit, however, is his idea for raising the money — namely, through a loan that’s deliberately designed never to be paid back:

I propose that the European Union should raise the money needed for the Recovery Fund by selling “perpetual bonds,” on which the principal does not have to be repaid (although they can be repurchased or redeemed at the issuer’s discretion). Authorizing this issue should be the first priority for the forthcoming European Council summit on April 23.
- George Soros, Project Syndicate

Almost all bonds have a maturity date — a specified point in the future at which the bond issuer (i.e. the borrower) repays the bond purchaser (i.e. the lender). A perpetual bond, however, has no maturity date. Beyond the payment of interest on the amount borrowed, there is no obligation on the issuer to repay the loan itself.

As Soros points out, there’s nothing new about this idea — the British government first issued perpetual bonds known as Consols in 1751.

But would today’s investors be interested in a trillion euros-worth of EU perpetual bonds — especially if the ‘coupon’ (i.e. the annual interest payable) is very low? Possibly not, but Soros has a specific buyer in mind — one with very deep pockets: ‘…an EU-issued perpetual bond would be a very attractive asset for the ECB’s bond-purchase programs.’

I’m presuming this refers to the European Central Bank’s various doses of quantitative easing — i.e. the use of newly created money (in this case, euros) to purchase government debt and other financial assets with the aim of reducing borrowing costs.

To have the ECB buy up perpetual bonds, however, goes well beyond normal QE. In fact, QE plus perpetual bonds pretty much equals money creation to directly finance government spending.

But so what? These are exceptional circumstances, aren’t they? If the Soros scheme is what it takes to bail out the Italians etc. and save the EU, then so be it. The fact that perpetual bonds don’t have to be paid back might even persuade the Germans etc. to agree.

Except for one little problem: Using the ECB’s metaphorical printing press to finance public spending (whether at a EU, national or local level) seems to be illegal under article 123 of the Treaty on the Functioning of the European Union.

It would be ironic if the EU stopped functioning as a result.

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Fraser Bailey
Fraser Bailey
2 years ago

The fact this is technically ‘illegal’ is neither here nor there. They make up the rules as they go along, beggaring all decent, productive people in the process. As such, they will probably go for this or a similar wheeze. As you say, all these schemes are really nothing more than various means of printing money to pay for the state and the public sector. And the ultimate end state can only be Paper Money Collapse, something that the insane response to C-19 will bring a few years closer.

Stephen Follows
Stephen Follows
2 years ago

Another attempt by Soros to destroy the West.

Niko Lourotos
Niko Lourotos
2 years ago

Perpetual Bond = Perpetual Bondage.
The Europeans will now be renting their own countries from some bankers. Nothing to see here, folks.

beleaveinbetter
beleaveinbetter
2 years ago

Italy is the 3rd biggest owner of gold reserves in the world ( about 2,500 tonnes). How is it that Italy still manages to hold on to it, whilst the EU is still figuring out a scam to raise money to save Italy?. Please explain it to me, I’m a simple soul.

michael harris
michael harris
2 years ago

War Loan 3.5%. Issued 1932 to consolidate world war 1 debt. No redemption date. Final tranche paid off at par (lost 90%+ of value to inflation) in 2015. A popular conservative investment, paid 3.5% year in year out. easily tradable, listed on all stock exchanges. If you held for a few years you didn’t lose too much to inflation. Tough in the 1970s. But we are all easier losing money to inflation than taking a wage cut. Or rather Brits and Latin countries are easier, the Teutonic people not so.
This is the fundamental flaw of the euro. Italians, for example, even the Milanese, were happy to hold a currency that depreciated about 2% a year and get bigger salaries or dividends every year. We also are happy with a ‘floater’. The euro is for hard asset buffs; there’s the fundamental divide.
Yes there should be pandemic 3.5% undated; the Germans won’t buy it, but the French and the others will.