Bundesbank opposes eurozone debt redemption fund

(FRANKFURT) - The German central bank rejected on Monday proposals for a bond redemption fund allowing eurozone states to share liability for debts over and beyond defined EU ceilings.

The idea was first floated by Germany's council of economic advisors, an independent panel of experts which advises the government on economic matters.

They suggested that a special redemption or stabilisation fund be set up to prevent the eurozone's sovereign crisis from escalating out of control.

The fund would cover all public debts of member states above the ceiling of 60 percent laid down in the EU's Maastricht Treaty and would pay down the debt over 20-25 years.

But in its June monthly bulletin, the ultra-conservative Bundesbank said it was "very questionable whether (such a mechanism) could be implemented under existing European treaties and be compatible with German constitutional law."

The single currency bloc's existing bailout funds -- the European Financial Stability Facility or EFSF and its successor the European Stability Mechanism or ESM -- were better because there were linked with strict conditions and penalty interest rates on loans, the Bundesbank argued.

The central bank also warned that a mutualisation of debts would lower the pressure on states with higher financing costs to engage in sound fiscal policies and could ultimately damage Germany's credit rating.

"Comprehensive shared liability would throw liability and monitoring considerably out of balance" as it would not entail an increase in the powers of European authorities to intervene, it said.

Germany, Europe's top economy and the bloc's effective paymaster, is vehemently opposed to sharing eurozone debt, including proposals for joint debt in the form of eurobonds.