Troubled states may face 'administration'

The European Commission could, in extreme cases, put a euro zone country under administration if it fails to meet its financial obligations, according to guidelines for the possible introduction of joint euro zone bonds.

In a green paper to be published on Wednesday, the commission sets out how closer monitoring of countries' budgets could in the long-run make it possible to issue jointly underwritten euro zone debt.

In one section of the document, obtained by Reuters, officials flag the possibility that EU authorities could get powers to put a failing state into administration if it repeatedly fails to meet its commitments.

Such strict controls could satisfy Germany, which strongly opposes the idea of euro zone bonds, that such issuance in the future would not let spendthrift nations off the hook.

Germany is reluctant to back common bonds because it fears it would allow countries such as Greece to benefit from its top-notch credit rating without having to introduce overdue reforms.

Under the headline, "increased surveillance and intrusiveness in national fiscal policies", officials from the European Commission say the creditworthiness of any new scheme for common bonds must be steadfast.

"The servicing of Stability Bonds, or more specifically the payment of interest on common issuance, should not come under any circumstances into question," the green paper says.

"One option to this end would be to grant extensive intrusive power at EU level in cases of severe financial distress, including the possibility to put the failing member state under some form of 'administration'."

The paper flags another option of imposing a requirement on countries that borrow using a commonly issued bond to repay this debt first before they spend money in their national budgets.

It also describes the benefits of a common bond for banks, which are finding it difficult to borrow and increasingly turning to the European Central Bank for support.

"Stability Bonds would provide a source of more robust collateral for all banks in the euro area, reducing their vulnerability to deteriorating credit ratings of individual member states."

Reuters