By Sergio Goncalves and Andrei Khalip
LISBON, March 23 (Reuters) - Euro zone governments should ponder the issuance of common "coronabonds" specifically in response to the coronavirus pandemic to prevent a potential new sovereign debt crisis, European Central Bank policymaker Carlos Costa said on Monday.
In an article sent to Reuters, Costa, who is also governor of the Bank of Portugal, wrote that a common and wide-ranging response by Europe was needed to complement the ECB's bond-buying scheme, and the flexibility on fiscal discipline and state aid offered by the European Commission.
"Failure to cooperate in this crisis would permanently scar the European project," Costa wrote, adding that "solutions must be found in order to avoid that the coronavirus emergency becomes a second sovereign debt crisis".
He joins a growing number of ECB policymakers calling on euro zone governments to respond to the pandemic in a bold and coordinated way.
Also, the European Commission on Friday opened the door to loosening debt rules for member states and issuing common euro zone bonds to cushion the impact of the outbreak.
Costa said that unless all member states stood financially together regardless of their budgetary situation they risked financial markets "exploiting the weakest link".
The euro zone debt crisis at the start of the last decade, which put the common currency area's survival at risk, kicked off with massive selloffs in Greek and then Portuguese debt as investors saw the two countries as the weakest links due to their high indebtedness and weak economic prospects.
Both, especially Portugal, have since returned to growth and put their public finances on a healthier footing, but they still have some of the highest debt burdens in Europe.
Costa welcomed the European Commission's flexibility on state aid and fiscal rules, but said it was insufficient.
In his view, some of the proposed solutions, such as using the European Stability Mechanism's (ESM) credit lines, are flawed as they would still inflate member states' debts.
While he saw common euro zone bonds as "the appropriate solution", he said they lacked a ready-to-use vehicle for joint debt issuance, calling for innovative solutions.
"One option that deserves further analysis is the possibility of having the ESM issuing 'Corona bonds', with the proceeds being channeled to all Member States in need," he wrote.
Such bonds would be repayable through the EU's long-term budget, and would have very long maturities of several decades to dilute yearly contributions by member states. Proceeds would finance the coronavirus relief effort proportionately to the severity of the health crisis and economic woes brought by it.
With economic activity curtailed across Europe, infection numbers spiking and markets gripped by volatility, the ECB on Thursday expanded its bond-buying programme for 2020 by 750 billion euros ($802 billion) to 1.1 trillion euros.
($1 = 0.9354 euros) (Reporting by Sergio Goncalves and Andrei Khalip Editing by David Holmes)