Fear of the orphan bond is stalking Europe. This is the fear that, after the introduction of the euro in 1999, bonds in the national currencies whose exchange rates are locked will lose liquidity. They will have no benchmarks to trade over.
With the elimination of exchange and interest rate differences, investors will gravitate towards the biggest euro benchmarks. Market makers will lose interest in classes of bonds destined sooner or later to disappear. By 2002 all payment of interest and principal must be made in euro.
A foretaste is given by a City of Munich bond still denominated in wartime Reichsmarks. This 4% bond of 1944 was never redenominated but is being serviced at a rate of Dm1 to 10 Reichsmarks by the government debt agency the Bundesschuldenverwaltung - an orphan to beat all orphans.
To keep investors loyal, governments of euro states, especially the smaller countries, will want to...
