Could perpetual bonds be the solution to the ills of the European Union? According to George Soros Yes. While the EU is discussing the Franco-German proposal to launch a 500 billion euro recovery fund and awaits the Austro-Dutch counter-proposal, financier George Soros presents his recipe for saving Europe from the economic disaster caused by the coronavirus emergency.
“The EU is fighting the war of life against a virus that is threatening not only people's lives but also the survival of the Union. If member states start protecting their borders even from their fellow EU members they will destroy the principle of solidarity on which the Union was built. In reverse, Europe must resort to extraordinary measures to deal with an extraordinary situation which is affecting all EU members,” writes Soros in an article he signed with the title The EU should issue Perpetual Bonds.
Soros' recipe is precisely the Perpetual Bonds, also known as Consol Bonds, born in Great Britain to finance the war against Napoleon and also used by the United States in 1870. They are very different instruments from the coronabonds requested by Italy, but opposed by Germany and other Northern countries. Wanting to summarize their operating mechanism, it is loans with no maturity date that ensure the payment of a fixed interest rate higher than the market average and that the issuer may decide to redeem after a certain period of time.
In a subsequent interview given to Dutch newspaper DeTelegraaf, the Hungarian financier goes into the details of the proposal. According to Soros the “Consols represent a credible alternative to raising the community budget and would provide funds that could go to member states most affected by the pandemic, such as Italy and Spain. His proposal foresees that the European Union gives the green light to the use of sufficient "own resources" without waiting for the funds to be physically collected. The Consols could be authorized in a few weeks and would be issued by the European Commission in agreement with the ECB, attracting enormous interest in the bond market, especially in a period characterized by low or negative rates like the current one. Major buyers could be life insurance companies, which need long-dated bonds to offset their liabilities.
The Dutch, opposed to the coronabonds but also to the Franco-German proposal, at this point would be forced to decide whether to "continue to oppose the Consols and consequently accept a doubling of the budget, or convert into convinced supporters of the Consols and, if successful increase their contribution to the budget by only 5%.
Soros also gives a classic example: with an interest rate of 0,5%, a trillion perpetual bond would cost $5 billion a year, with an “incredibly low 1:200” ratio. The only thing member states would have to do is pay annual interest, a condition largely acceptable to all, according to him. A further advantage would then be to being able to disregard the participation fees and distribute the funds raised to those who need them most.
“Exceptional circumstances call for exceptional measures. – concludes Soros – Perpetual or consol bonds are this measure. In normal times they shouldn't even be considered, but if the European Union is unable to consider this proposal now it may not be able to survive the challenges it currently faces. This is not a theoretical possibility; this could be the tragic reality”.
