The Irresistible Appeal of War Bonds

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    As the Swedish flag finally joined the colourful flutter of banners in front of NATO’s Headquarters on Monday this week, it offered a perfect occasion to reflect upon the importance of military bonds and alliances. In his speech at the official ceremony, Secretary General Stoltenberg argued passionately it was the transatlantic bond between Europe and North America that had ensured our freedom and security for the past seven-plus decades. “All for one and one for all,” he exclaimed, channelling his inner d’Artagnan.

    Bonds, of course, are only as strong as their weakest link, and Sweden might yet discover that the inner makings of the venerable alliance abound in flimsy fabric. While Russia’s invasion of Ukraine may have re-invigorated and amalgamated the motley crew of allies, plenty of thorny questions remain. How strong is the US’ commitment to Europe’s defence, really? And what is the alliance’s purpose, beyond containing Putin’s aggressive tendencies? Then there is the old nuclear dilemma. Many members’ reserved attitude towards the controversial weapons, however relatable, seems also quite naïve. It is, after all, the nuclear guarantee that underpins the alliance.

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    How much should we spend on defence is also a matter of serious contention. Earlier this week, Polish President Andrzej Duda promised to raise the question in his upcoming talks with President Biden. Once bitten, twice shy, Poland, understandably, seeks reinforcement for the alliance’s eastern flank and is proposing that NATO members raise the minimum level of defence spending from 2% to 3% of economic output.

    Ah, but where would the money for such a substantial ramp-up come from, you might ask. Remember, interest payments already surpass the defence spending in seven European NATO countries. In Italy, for instance, interest costs are three times the annual military expenditure.

    Enter EU war bonds.

    “The beauty of EU bonds is that the debt doesn’t appear in your national statistics, it doesn’t count toward Maastricht or the debt brake or anything like that,” explains Moritz Kraemer, chief economist at German bank LBBW, for InvestmentNews. “So, in principle, you can get funding for whatever you think you need without having to incur the penalty.” EU bonds, in other words, would provide a loophole in the bloc-wide treaty that seeks to limit budget deficits to 3% of GDP, or the borrowing cap built-in in Germany’s constitution.

    “Bond Investors Are Lining Up to Fund the War Against Putin,” reports Bloomberg this week, suggesting that a potential issuance would be gulped down by fund managers. Apart from a genuine desire to boost defence and help a beleaguered Ukraine, they might have some ulterior motives. For one, debt managers are currently starved of AAA-rated securities, especially since the US was stripped of its top-tier rating last year. EU bonds also tend to pay a neat premium over similarly rated sovereigns, as witnessed by the successful run of the union’s Covid bonds.

    So, there you have it: a typical win-win situation. A clever way to make more bullets and more money at the same time. Simply irresistible!

    The only thing that remains is for responsible investors to make up their minds on whether the new war bonds are sustainable or not, I guess. I wonder what colour they will be described by. Military green, perchance?

    Image courtesy of Boston Public Library on Unsplash
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.
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