Eurobonds Good in Theory - TheStreet

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (

TheStreet

) -- In theory, the issuance of Eurobonds would add significant credibility to addressing the massive (2 trillion euro) debt problem faced by Europe. After all, the collective fiscal strength and resources of 17 nations, some of which are actually fiscally solid, would provide assurance to investors that the debt obligations of these countries would ultimately be paid back in full.

The challenge, however, is that despite a shared monetary policy among the 17 nations, the fact remains that these 17 countries follow far different fiscal policies. It is this difference in governments' raising revenues (or lack thereof) and spending discipline (or lack thereof) that hampers the ability to get all European politicians (and citizens) on the same page.

After all, why should the German government, which can currently borrow money at low rates, effectively subsidize countries like Italy and Spain, whose borrowing costs are more than twice as high? The issuance of Eurobonds -- borrowing rates would surely be higher than the current rates at which Germany borrows -- is effectively a tax (or wealth transfer) from Germans and French to Greeks, Spaniards and Italians.

>> Eurobonds Explained in U.S. Terms

Conversely, would Spanish politicians really be willing to adhere to a much tighter fiscal policy given the country's perniciously high unemployment rate? Can you imagine the political backlash that Spanish politicians would face from its citizens?

Unfortunately for the politicians in Europe, the tolerance of the investment community to "kick the debt can down the road" has worn thin. Investors finally recognize that there is not enough money, under the current EFSF mechanism, to avoid haircuts and/or defaults on existing sovereign debt issues. Accordingly, they are unlikely to enable governments to return to the financial markets and finance their forthcoming debt maturities other than under usurious terms. Without such capital, these governments cannot operate.

As such, European politicians face a dilemma with no ideal outcomes. The issuance of Eurobonds comes at a meaningfully higher cost to Germans and French than they currently face. However, the alternatives are to have the ECB print money (which means that inflation rekindles and the Germans and French ultimately pay even higher borrowing costs anyway) or to allow for defaults on sovereign debt (which would lead to chaos in the global financial system, a global recession, and even greater economic damage to the German and French economies).

Faced with three lousy alternatives, and with investors forcing a faster resolution than 17 separate parliaments have time to reconcile, the issuance of Eurobonds in conjunction seems likely. Such issuance will come, however, in conjunction with a variety of complementary strategies such as the ECB lowering short-term interest rates again, IMF financial support, more "voluntary rollovers" of debt from private investors (which are effectively haircuts that avoid triggering defaults and insolvencies), and announcements of support from the U.S. and China.

Alan Zafran is a partner of

Luminous Capital

, a $4 billion financial-advisory firm providing wealth-management services to high-net-worth families. He has over 20 years of industry experience, previously serving as a wealth adviser for affluent families at Goldman Sachs and Merrill Lynch. Zafran's experiences include facilitating the execution of credit default swaps on subprime residential mortgages in 2006 and 2007 before the market crashed. He is a contributor to TheStreet, Forbes.com and Wall Street Week. Zafran received his MBA from Harvard Business School after graduating Phi Beta Kappa from Stanford University.