Euro Zone Mulls Covered Bonds For Italy, Spain

Euro zone experts discussed a Finnish proposal for Spain and Italy to issue covered bonds to make their debt more attractive and to allow the euro zone's permanent bailout fund to bid at primary auctions of the two countries, officials said on Thursday, Reuters reported. The aim of the Eurogroup Working Group of deputy finance ministers and treasury officials is to find a way to lower financing costs for the two sovereigns that European Union leaders meeting in Brussels could discuss later. "The EWG is discussing the Finnish proposal on covered bonds and their role in primary market support for Spain and Italy," one euro zone official said. The idea is for the European Stability Mechanism (ESM) to help Spain and Italy at primary auctions of their bonds through a bond buying program. But for such support to be effective, the ESM would have to drop its preferred creditor status. "If you are selling your government bonds in the open market, you cannot give one of the buyers a preferred creditor status - that does not make any sense, so the ESM would not have a preferred creditor status in such a situation," the euro zone official said. The ESM's preferred creditor status is also an issue discussed in relation to up to 100 billion euros of emergency loans for the recapitalization of the Spanish banking sector, as investors are worried they would be paid last in case of a default by Madrid. Read more.