What are Corona Bonds?
Corona Bonds labelled as social bonds or thematic bonds, are issued to fight the negative effects of the COVID-19 pandemic by improving works on areas related to healthcare, digitization, supply chains, and alike.
Why issue such bonds?
- The healthcare sector is one of the main areas where the proceeds of the funds would be used. The aim would be to improve the network of production, storage, and distribution of essential equipment.
- An important reason to issue these bonds was ‘liquidity’. In this uncertain time, liquidity has been one of the most important things required in order to revive the economy and to fill in the gap created due to the pandemic.
- The small businesses have been massively affected due to the pandemic. Funds from Corona Bonds would be used to revive these businesses and, in a way, save them from going bankrupt.
- Such bonds could be raised in order to provide payments to individuals relating to tax refunds. This would lead to more money in the hands of the public and in a way more spending on things required.
What happened in Europe?
- Nine countries called for a common debt instrument issued by a European Union Council to fight the pandemic. This led to an acerbic debate between the members of the Eurozone countries as to whether or not the debt must be issued jointly to address the issues related to healthcare and economic recovery.
- The idea of a common debt was first floated out in 2011 during the 2009-12 sovereign debt crisis. They were then termed as Eurobonds or Stability bonds, where indebted countries could borrow new funds at a cheaper rate since they were backed by better ratings of non-crisis states. This idea was however muted as it received strong opposition from Germany and Netherlands. The German Central Bank summed it up by saying “You do not confide your credit card to someone without any possibility to control his expenditures.”
- The proposal of a common debt came up again in 2020 to fight the pandemic in the form of Corona Bonds. It was favoured by nine Eurozone countries. However, it again received strong opposition from Germany and the Frugal Four (Netherlands, Denmark, Sweden, and Austria) countries, as debt sharing remains a taboo among them. Germany even follows the policy of “Schwarze Null” or black zero wherein they don’t believe in allowing government borrowing under any circumstance. However, this policy was temporarily suspended by Germany so they could raise funds on an individual level. Thus, the idea of Corona Bonds was ultimately put down in the European Union.
The Acerbic Debate
- Nine EU nations namely Italy, Spain, France, Belgium, Luxembourg, Ireland, Portugal, Greece, and Slovenia are supporters of Corona Bonds. They are of the view that it is not an act of charity but instead involves protecting the common European project against a challenge that affects all through the fault of none. As is seen in the graph below, for the year 2020, most of the countries have their consolidated gross debt as a percent of GDP nearing 100. Some counties are even past 100%. This was the main reason why these countries are in favour of a common sovereign debt. The percentage for the European Union stands at an alarming 93.9% thus arising the need for Corona Bonds.
- Other nations such as Germany and the Frugal Four consider debt sharing as a taboo and believe that finance is a country’s individual responsibility and it must be taken care of by all the members themselves. As seen from the graph above, for these countries the debt as a % of GDP, is much lower when compared to other countries. They believe that no one should be allowed to live at the expense of others and are therefore strongly against the issuance of such bonds where even they will have to act as guarantors.
Advantages of Issuing such Bonds:
- These bonds would provide more fiscal space as the national debt of the states will not expand.
- The EU countries would get big financial aid and can then use the funds for various purposes.
- As this pandemic affects everyone because of the fault of none, issuance of such bonds would strengthen the trust and unity among everyone.
Disadvantages of Issuing Such Bonds:
- The issuance of such bonds can take a lot of time as many regulations need to be complied with. A long delay would not be ideal in such a situation as it could prove ineffective if not issued at the correct time.
- Moreover, the proceeds would be used to provide relief to certain stressed companies and organizations. This could give way to future debt forgiveness.
- It is not necessary that the issuance of such bonds is a one-stop solution for all issues. It is not a guarantee that things will be back on track after the issuance of such bonds.
Corona Bonds can act as a good support to revive the economy and support the financial requirements of a country. In Europe, we might see the issuance of these bonds if the nations agree to it. Another alternative that can be used in Europe is the European Stability Mechanism (ESM) (commonly known as the Eurozone bailout fund) to assist the nations financially. The ESM with a lending capacity of € 410 billion allows member states to avail loans at lower interest rates. Even corporates can issue Corona bonds who are facing difficulties in carrying out their operations due to the negative impacts of the crisis. We are yet to see issue of bonds under the head Corona Bonds and how effective they would be in shaping future growth and development of an economy.
Contributed By: Team Leveraged Growth
Co-Contributor: Rashi Kajaria