Calling Alexander Hamilton (Part 2)

Whenever nations have consolidated their currencies, they’ve needed to establish their credit in order to manage their finances. Shortly after the discovery of America, Spain issued debt under a hybrid city/state model to finance its exploration. In 18th century England Parliament issued bonds through earmarked taxes: each new bond issued was funded by an excise tax on specific items. In the new United States, the Federal Government purchased, at par, the debts that the states had accumulated during the American Revolution.

Financial markets today are far more sophisticated. But one thing that hasn’t changed is the importance of the credibility of the debt. When a central institution issues bonds, a number of things happen. First, of course, the government obtains cash to manage its affairs. The central bank also acquires a means to manage the money supply. The bondholders hold an interest-bearing asset with an implied real return. And the financial market achieves a level of credibility over the years as the government services its debt and financial transactions take place in a transparent and efficient manner.

Eurobonds would give the Euro-zone financial credibility. They need not be issued to assume all the member countries’ debts, but their issuance could cover a certain percentage, say, 50%. They would be guaranteed by the Euro-zone as a whole but would be supported by a dedicated tax, like England’s earmarked bonds. And most importantly they would allow participating countries to lower their financing costs.

Hamilton was only able to get his planned debt assumption through Congress via a grand compromise. It’s likely that Europe will need similar statesmanship. But consolidated debt could help the Euro-zone establish the credibility it needs to move forward.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-09T16:55:11+00:00 January 20th, 2012|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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