(Repeats Friday's story without changes)
By Natsuko Waki
LONDON, Feb 26 (Reuters) - Opposition to the issuance of bonds guaranteed by all 16 euro zone governments has gathered momentum with the escalating Greek debt crisis, but such bonds could prove beneficial to all members including Germany.
As concerns rise over the ability of Greece to finance its borrowing and the euro zone tackles its biggest debt crisis ever, policymakers are considering a number of options to solve the fiscal woes.
One idea on the table has been to issue common bonds backed by all 16 members that would cover the first 40 percent of the region's total government debt.
The idea for such a market has been floated in the past, but has always met with fierce opposition from Germany and other "core" countries. They say their disciplined fiscal stance will be diluted by weak members, while their funding cost -- lowest in the bloc -- will rise to accommodate indebted colleagues.
However, the scheme could bring benefits for all members. The sheer liquidity the unified market would bring has potential to lower yields for fiscally sound countries.
According to some estimates, the market could develop into a highly liquid bond class of some 4 trillion euros, four times the size of German bunds, the region's safest, and a true contender to the estimated $6-7 trillion U.S. Treasury market.
"Politically we're not anywhere close to that... but it would be more attractive to have a larger, deeper and more liquid market. The common bond may facilitate the evolution of the market," said Jon Stopford, head of fixed income at Anglo-South African Investec Asset Management.
A common bond would also help develop wider futures contracts for the euro zone as opposed to the current German bund futures, making it more effective and attractive for investors to hedge their underlying debt.
Single euro zone bonds, which if established may surpass U.S. Treasuries as the world's biggest market, are likely to attract a wide range of investors, including banks, fund managers and even central bank reserve managers.
Goldman Sachs argues that a common bond would automatically increase liquidity by simply pooling the region's debt issuance -- a phenomenon seen in the euro zone corporate bond market where total issuance of non-financial paper nearly doubled in nine years since the euro birth at 2000.
"A common bond with a joint guarantee could, in principle, benefit everybody," the bank said in a 2009 research paper.
"Pooling debt issuance through a common bond would eventually eliminate the liquidity-induced spread widening. Moreover, the effect would be reinforced by the fact that a common bond would, after some time, surpass the most liquid government bonds in the euro zone, implying also a lower liquidity premium for Germany."
The gross domestic product-weighted average of 10-year yields from all euro zone bonds stand at just below 4 percent, according to Julius Baer, compared with 3.12 percent for Germany
WINNING EXCESS RESERVES
Having a deep and liquid bond market also helps attracts official institutions, who are keen to diversify their holdings away from the dollar and U.S. Treasuries.
According to the International Monetary Fund, the euro's share of the $4.4 trillion of the world's currency reserves where detailed breakdowns were available stands at 28 percent, compared with the dollar's 61 percent.
China and Japan are the world's top reserve holders and also biggest buyers of U.S. Treasuries, each holding more than $750 billion as of December 2009.
"With the common bond, the euro becomes more clearly a reserve currency," Stopford said.
"The world is looking for an alternative for having excess reserves held in dollars. The euro has long been touted as an alternative but it clearly has issues. The United States has a deeper liquid capital market because a unified Treasury market provided a liquid yield curve."
A unified bond would make the euro zone a viable contender to the United States in attracting these dollar-based reserves, especially from China and other emerging economies whose excess FX reserves are expanding rapidly -- a point highlighted by the Securities Industry and Financial Market Association in 2008.
"A commonly issued European government bond would better enable Europe to compete with the U.S. Treasury market globally," the SIFMA said in a paper.
"By creating a consolidated T-bill product, a common European debt instrument could aid the development of the euro as a reserve currency."
The SIFMA also said joint issuance would deliver steadier and more predictable supply, while the lower cost of liquidity management would solve an issue for some issuers who presently have to pay for the need to retain long term cash positions in order to fund short term gaps when their debt matures.
Global investors, according to Reuters polls released on Thursday, currently hold an average of 39.0 percent in euro zone bonds -- including government and corporate debt -- compared with 32.4 percent in the United States.
BUNDLED RISKS
Some investors say however that the unified bond makes it harder to identify sovereign risks and removes an arbitrage opportunity. Having been burnt during the credit crisis by collateralised debt obligations which bundled different levels of risks into credit instrument, investors are particularly wary of this type of structure.
It could also lead to fiscal slippage, allowing indebted countries like Greece to keep borrowing at a favourable rate and dimming the overall attractiveness of the euro zone debt.
"I would rather have risk chopped up so that it's visible to me and can take opportunities. (Positions such as) long Greek bonds and short bunds -- it's easier for me to do that if you haven't got a homogenous lump of euro sovereign note," said Gary Reynolds, chief investment officer at asset manager Courtiers.
"In many ways the current structure unbundles all the risks so it's easy to take views. If you've got a single market, you have to basket together all the risks. At the moment there is incentive for Greece to sort out their finances. With the single bond there will be almost no incentives."
(Editing by Toby Chopra)