Our proposal for European Safe Bonds (ESBies) is now available:
We welcome comments, which may be incorporated in future revisions of this proposal.
Our proposal for European Safe Bonds (ESBies) is now available:
We welcome comments, which may be incorporated in future revisions of this proposal.
So, the structured product as a whole is only self-sustaining if the premium on the ESBy tranche is greater than the discount on the bad tranche, right? Meanwhile, the Eurozone will need to put up additional funds as a backstop.
What if it never balances out? There may be a clearing price for the bad tranche in the private market, but what if it isn’t high enough? Won’t the EDA need periodic injections of cash from the Eurozone to break even?
Really excellent proposal, you have thought out many of the practical issues preventing the Eurobond debate going forward. I’ve posted about ESBies on my blog, check it out: http://www.getthepennyrolling.blogspot.com
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This is a nice proposal, but I have to doubts:
– the authors’ underlying assumption seems that the recovery value in case of a sovereign default would always be large enough to service debts equivalent to 60 percent of GDP. But how do the authors know that the recovery value would be large enough? Any uncertainty about this would compromise the perceived safety of ESBs.
– specifically, what if a country is structurally incompetitive and can resolve this only by leaving the euro? In this case it would seem unlikely that the recovery value is sufficient. The only solution seems to exclude bonds of structurally incompetitive countries from the ESB. But who decides what sovereign bonds go in and which ones stay out? And even if countries could be excluded from the ESB, what about future asymmetric shocks to the euro area that create unsustainbable competitiveness situations?