At the heart of the now rising debate in Europe is the idea of Eurobonds.  Simply, that the region itself issues a bond that represents the Union as a whole – ultimately helping to fund a bigger and more effective European Financial Stability Facility.  But, the idea has come under massive scrutiny by German officials, who are blocking the idea for major reasons.  This will likely keep the overall debate of a resolution going on in the EZ for now – not a good sign for the EURUSD.

Although the idea of benchmark bond for the European Union is sound, the implementation of such a broad measure is highly unlikely at this point.  Forget about the recent impasses and indecisions when it came to the initially proposed group of resolutions for the Union back in September.  A new Eurobond issuance would require months to put in place as national governments would have to first sort out their fiscal records.  Once this is completed, the proposed process would involve a financial and economic evaluation by higher ranking authorities at the European Central Bank and European Commission.  And, those are just the initial phases – which will likely include the augmentation of several of the EU’s treaties.

Then there’s the issue of credit ratings.

Currently, Germany benefits from a triple A rating from the global credit agencies.  But, with a regional eurobond issue, that credit rating is likely to be downgraded or placed under watch.  The country’s bonds and credit risk would now assume less than exemplary ratings from other countries in the European Union – like Italy’s A rating or an even worse Greek CC rating.  This would complicate the funding environment for Germany – causing potential problems for the country’s benchmark bond yield.

However, there are potential solutions that have been presented.  For one, a series of joint and individual  guarantees could be made by certain countries throughout the region.  Essentially, every country would be liable for their own share of the eurobond issuance as well as other countries.  Not a German favorite.

Second options, which have been provided by a privately held German institute, would allow a member’s eurobond issuance equal to 60% of a debt to GDP limit established by EU treaties.  These countries would additionally have the option and responsibility of their own private issuances above the limit.

These could potentially work.  But, these options additionally pose time horizon problems as their creation and ultimate implementation could extend the current crisis by another year or so.  As a result, although short term profit taking is likely to spark some temporary Euro buying, the overall long term short trend is likely to continue.  This is particularly true if the pair continues to find extreme difficulty in breaking above the 1.3550 resistance.