European Safe Bonds

We have written a proposal for the creation of European Safe Bonds (ESBies), which is available here.   We believe ESBies can play an important role in improving the operation of the eurozone.  In the coming weeks, we will make further proposals on other required reforms that are necessary for the future of the eurozone. We provide an overview of the ESBies proposal in this WSJ article, and numerous other OpEds across Europe.

Please click for an executive summary and Q&A document.

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12 Responses to European Safe Bonds

  1. Owen Rooney says:

    A fascinating proposal, but I do have one small issue. Perhaps the primary appeal of 
    ESBies would be in their independence from the European political process, and in particular the strict weighting of bonds by GDP. However, as you rightly point out, this weighting couldn’t be maintained in cases where a particular eurozone country simply isn’t issuing enough bonds to satisfy the EDA’s requirements. I don’t feel that to say that the EDA would “increase the weight of countries that are similiar to it in credit risk” is sufficient to cover the possibility that such a scenario would be used to artificially increase the proportion of less creditworthy bonds in the portfolio. For one, even in the best of times, the phrase “similar in credit risk” is subjective, and in this case, neither of the two primary means of establishing credit risk would be suitable; market prices of bonds couldn’t be used as, were the EDA to hold 100% of bonds, they wouldn’t exist, and credit ratings couldn’t be used for fear that a European credit rating agency would be established to artificially increase ratings. Furthermore, even if an objective measure of credit risk were established, it would still be entirely likely than other countries with similar credit risk would also be in the position of not issuing enough bonds to satisfy the EDA’s requirements.

    An alternative approach would be to simply treat the weighting as inviolable, and commit to issuing new debt as the EDA requires it, even if that country wouldn’t be issuing debt otherwise. It may seem a bit perverse to force countries to maintain a certain level of debt, but their overall indebtedness wouldn’t be affected so long as they are effectively swapping new debt for a safe, liquid, euro-denominated asset like the ESB.

  2. kristopher says:

    The ESBie idea is very interesting, and looks like a good application of tranching technology. Thank you for positively contributing to the Euro-zone discussion.

  3. yoganmahew says:

    Any chance of an RSS feed for the blog posts?

  4. Annika says:

    On the broader issues surrounding the euro zone crisis – http://fairobserver.com/article/its-europe-not-euro-stupid

  5. Halim says:

    To me, the most important factor in the Euro crisis in the fact that Europe is not an optimum currency area. Exchange rate adjutments are shut down with a common currency and this is problematic in an area that has regions with different economic need and different cultures (legal and social). How do ESBies address the common currency problems. So they mitigate the asymetric shoks? Do they create a new heatlhy adjustment mechanism replacing exchange rates adjustments? It seems that it can be instructive to frame the questions for the usefulness of ESBies in the conceptual context of the common currency areas.

  6. The suggestion of a new highly rated financing instrument is interesting but it doesn’t really address the fundamental problem of increasing divergence in the fortunes of the members of the Eurozone, plagued by Germany’s massive CAB surplus.

    The official bailouts have helped to refinance maturing debt of Greece, Irland and Portugal, but these and other countries have received little real debt relief in the form debt restructuring and longer tenors.

    The Eurozone crisis cannot hope to touch bottom until:
    1. The overleveraged European bank creditors are properly recapitalized, from official national sources if need be,preferably before the end of this month of December 2011, to avoid mark-to-market impairments. The prudential regulators in the NCBs must do their job.
    2. Then the banks and other investors can agree to restructure and refinance the maturing external debt of the deficit countries and even provide for new export financing, in counterpart to their domestic austerity measures.
    3. With some material debt relief, the overleveraged debtor countries can then hope to begin to workout the excess debt burden
    4. Ultimately, Current Account imbalances within the Eurozone have to be sharply reduced, inverting the divergence of the Euro decade.

    In this context, the endless discussion of one more “blue bond”, on more budget rule, or one more Treaty, which can be ignored, misapplied or gamed as happenned with the Maastricht convergence criteria, may be great political theatre but will not resolve the Eurozone’s problems.

    See PPP Lusofonia http://ppplusofonia.blogspot.com/2011/12/eurozone-crisis-tests-limits-of.html

  7. silver price says:

    There is in principle an evolution possible from Eurobills to Blue-Red Bonds (Figure 1). But the transition is not straightforward. With its large scale, the Blue-Red Bond proposal is a greyer legal zone than are Eurobills. Moreover, as with the ESBies, the challenges arise in the junior tranche, the Red Bond.

  8. mercadee says:

    This document lays down the details of how ESBies work. The next section explains the proposal. Section 3 lists the main benefits that ESBies would bring. Section 4 to 6 go deeper into the nuts and bolts of ESBies explaining, in turn, how their composition is determined, how their safety is ensured, and how they would be issued. Section 7 compares our proposal with alternatives, the leading one being Eurobonds. Section 8 briefly concludes.

  9. We have written a proposal for the creation of European Safe Bonds (ESBies), which is available here . We believe ESBies can play an important role in improving the operation of the eurozone. In the coming weeks, we will make further proposals on other required reforms that are necessary for the future of the eurozone. We provide an overview of the ESBies proposal in this WSJ article , and numerous other OpEds across Europe .

  10. There is in principle an evolution possible from Eurobills to Blue-Red Bonds (Figure 1). But the transition is not straightforward. With its large scale, the Blue-Red Bond proposal is a greyer legal zone than are Eurobills. Moreover, as with the ESBies, the challenges arise in the junior tranche, the Red Bond.

  11. Idebenone says:

    Our proposal goes further than theirs. On top of diversification, we add tranching and potentially the capital guarantee in order to make the ESBies truly safe. The focus of the ESBies is not to create a Euro-wide security per se, but to create a safe security. The synthetic Eurobonds are a portfolio that includes both the ESBies and the junior tranche in our proposal. They are much less safe than the ESBies. Finally, we envision the EDA as being immune from political pressure, and the sovereigns as continuing to issue sovereign debt alongside the ESBies, and have provided much detail in the previous sections on how to design the system to achieve these goals. In sum, the ESBies share he same starting point as the synthetic Eurobonds but go much further.

  12. silver price says:

    ESBies would be an important ingredient in making the eurozone safer and avoid perverse incentives of socializing national debt among all Eurozone member states. They would also help to tap into the large and growing demand for «safe» international assets, generating a nice source of income for the Eurozone.

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