European Commission paper proposes packaging different countries' debt into new sovereign bond-backed securities - FT (update)
- Would bundle Euro zone sovereign debt into new financial instrument and sell it to investors
- Aims to increase demand for debt from govt in weaker economic standing and to prod banks to manage risks better by diversifying portfolios
- The new plan would not pool, or interfere with, national governments’ debt issuance, but build on technical work in recent months by EU regulators that is expected to be completed by November.
-The commission will present the idea on Wednesday as part of a broader reflection paper on the future of the euro.
Brussels presses plan to bundle eurozone debt
European Commission wants securitisation plan to avoid rows over common bond issuance
Brussels is pressing for sovereign debt from across the eurozone to be bundled into a new financial instrument and sold to investors as part of a proposal to strengthen the single currency area.
A European Commission paper on the future of the euro, seen by the Financial Times, advocates the launching of a market of “sovereign bond-backed securities” — packaging different countries’ national debt into a new asset.
Officials hope that the plans would boost demand for debt issued by governments with relatively weaker economies, and encourage banks to manage their risks better by diversifying their portfolios, while avoiding old political battles over whether the currency bloc should issue common bonds.
The commission paper is the latest in a series of efforts to kick-start integration inside the eurozone.
Such integration efforts have stalled since financial markets became convinced in 2013 that the European Central Bank would not allow the eurozone to break up. The most recent successful integration project was the creation of an EU banking union three years ago.
Although the markets have warmed to eurozone debt since the height of the crisis, many analysts believe the sentiment is reliant on continued sovereign bond purchases by the ECB as part of its unprecedented economic stimulus programme, which shows no signs of letting up.
If the ECB were to back off on quantitative easing, some eurozone countries could again become vulnerable, and many officials have urged that issuing bonds backed by all 19 eurozone countries would be the easiest way to keep borrowing costs low for underperforming economies.
Germany has strongly resisted such “eurobond” schemes, since it would in effect mean that Berlin is using its own credit strength to support the rest of the eurozone.
The new plan would not pool, or interfere with, national governments’ debt issuance — a red line for Berlin. The plans build on technical work in recent months by EU regulators that is expected to be completed by November.
The commission will present the idea on Wednesday as part of a broader reflection paper on the future of the euro.
Brussels’ intention is that the market for securitised bonds could be established in the shorter term while talks continue on more far-reaching possibilities for Europe to develop a security that could replicate the role that US Treasury bonds play on the global market.
The paper notes that these more ambitious ideas for creating a “European Safe Asset” raise “a number of complex, legal, political and institutional questions that would need to be explored in greater detail” and that the whole issue of debt mutualisation in the eurozone “is heavily debated.”
The debate over the future of the eurozone has been given renewed impetus by the election of Emmanuel Macron in France, who is pushing for a common eurozone budget and central finance minister; Paris and Berlin have agreed to look jointly at reform options.
In addition to new financing instruments, the paper sets out a broader reform agenda up to 2019 and another set of more ambitious options for the period leading up to 2025.
According to the document, Brussels is studying different options for how to directly tie EU funding to countries’ willingness to follow sound economic policies.
The paper also sets out different possibilities for new euro area-wide funds that could be tapped by countries in times of need, including a “European Investment Protection Scheme,” a “European Unemployment Reinsurance Scheme” and a “Rainy Day Fund.”