Van Rompuy’s Euro Blueprint Said to Have Options on Bills

European Union President Herman Van Rompuy’s blueprint for the future of the euro is shaping up to include a discussion of jointly issued short-term bills, a debt-redemption fund and common banking supervision, according to two officials familiar with the work on the project.

The findings will be presented to EU leaders in Brussels next week by Van Rompuy, European Central Bank President Mario Draghi, European Commission President Jose Barroso and Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers. The report is confidential and still in development, and it isn’t clear whether it will include a recommended course of action along with its highlighted topics, said the officials, who asked not to be identified.

Euro-area finance chiefs meet today in Luxembourg as policy makers struggle to find ways to shore up confidence in the euro as Greece’s debt woes and soaring Spanish bond yields tear at the fabric of the 17-nation currency bloc. EU leaders clashed over joint debt sales in May, leading them to ask Van Rompuy to set out “building blocks” toward more integration. Jointly issued debt and cross-border deposit insurance were two of the areas flagged for closer study.

As the report comes together, the officials said, work is focusing on two possible debt options: jointly issued short-term bills and a debt redemption fund, as has been proposed by economic advisers to German Chancellor Angela Merkel. Neither idea has gained traction with Merkel, who also is resisting separate proposals for direct sovereign-debt purchases through the euro-area bailout fund.

Eight Years

While French President Francois Hollande is pushing to use the European Stability Mechanism to purchase indebted nations’ bonds as a way to counter rising yields, such a move “is not up for debate” at present, Merkel said yesterday. Spain today paid the most in at least eight years to sell three-year debt ahead of stress-test results that will determine how much its banks need from European rescue funds.

Issuance of short-term bills and a debt redemption fund would each represent progress from current country-specific borrowing arrangements, though both have limits that may make them intermediate steps toward jointly issued medium- and long-term debt. Euro bills would have very short maturities, thus limiting common exposure, said one of the officials.

Redemption Fund

A redemption fund could use pooled money to pay down existing bonds and lower the debt levels of participating nations, without changing the way countries borrow going forward, one of the officials said.

A spokesman for the ECB declined to comment. Two spokespeople for Van Rompuy weren’t available to comment.

On the banking front, the report may clear the way for more integrated bank supervision by signaling plans to consolidate regulation across the 17-nation euro area and possibly other countries as well, the officials said.

Coordinated supervisory powers could be taken on by either the ECB or the European Banking Authority, the officials said. The Frankfurt-based ECB could be given the new powers under clauses in existing treaties and may serve as an umbrella over national supervisors, rather than building a separate organization, officials said.

The EBA would have to take on new duties in its role of implementing legislation enacted by the European Parliament and member nations, one of the officials said.

Supervision Mandate

The U.K., which is not a member of the euro, would probably not be part of the combined supervision mandate, both officials said. Instead, any common supervision would likely encompass the euro area and countries that may some day join the euro. Those nations not currently in the common currency might further be given discretion over whether to opt in to the rule, one of the officials said.

The report is unlikely to call for immediate action on a cross-border deposit insurance fund, the officials said. Instead, the European Commission probably will offer new proposals on that topic in the last quarter of 2012, one of the officials said.

The Brussels-based commission, the EU’s regulatory arm, this month proposed requiring senior unsecured creditors to absorb losses when banks fail, in a proposal that also requires national-level resolution funds that would coordinate and backstop each other across borders when necessary.

EU rules require countries to have national deposit insurance guarantee plans; as yet there are no formal proposals for an EU-wide deposit guarantee backstop.

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