Eurozone – Sovereign Bonds Backed Securities: Possible precedent or alternative for the EuroBonds?


To strengthen the eurozone, the European Commission has just launched the idea of creating products backed by European sovereign debt, a proposal which could be more an alternative than a precedent for the Eurobonds. On May 31, 2017, the European Commission presented its analysis on the “deepening of the Economic and Monetary Union”[1], which had been planned for several months. Brussels, however, benefits from the euphoric moment following Emmanuel Macron’s election for the French presidency on May 7. Since his election, the latter has sought to relaunch the process of strengthening and deepening the eurozone, notably by wanting to build a common target with Germany.

On the first visit of the new French President to Berlin on 15 May[2], Angela Merkel remained very vague about what Germany was prepared to accept, but she said she wanted to create a new dynamic with France. She seemed ready to change treaties and focus on a stronger eurozone. A Franco-German working group was trained on this issue on May 22 and is expected to present some results at the Franco-German Council of Ministers planned on July 13[3]. It was therefore an excellent opportunity for the Commission to take part in this discussion, the reflection of which would be submitted to the European Council and Parliament in the near future.

Among the forwarded proposals, one particularly drew our attention: the creation of a financial product grouping together a part of the debts of the eurozone states. The Commission calls them the Sovereign Bonds Backed Securities (SBBS), a financial product currently being the subject of a study by the European Systemic Risk Board (ESRB) in Frankfurt. It could take an important place in the future architecture of the eurozone. Let’s elaborate:

Sovereign debt “Subprimes” in the euro zone

The SBBS are largely inspired by a proposal which has been discussed and deepened since 2011 by a group of economists called Euronomics led by the German Markus Brunnenmeier[4]. These economists have developed the idea of ​​”European Safe Bonds” (ESB), which has further on become the SBBS since this group succeeded in making the ECB and the ESRB think about this issue.

These financial products are simply backed by sovereign bonds. Private banks or a European debt agency (still to be decided) will receive a part of the debt issued from the eurozone countries. The distribution of debts in the assets will have to match the weight of each country in the economy of the eurozone. On the liabilities side, debt securities will be secured by this asset sovereign debt. The Euronomics group then proposes to issue two types of debt: a “senior” debt which will be a priority, accepted as collateral by the ECB and judged by the banking regulators as “safe”; and a “junior” debt, which will absorb risks in case of default by a eurozone country…

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Notes :
[1] Source: European Commission, Reflection Paper on the deepening of the Economic and Monetary Union, 31/05/2017.
[2] Source: Le Monde, 16/05/2017
[3] Source: Le Monde, 23/05/2017
[4] Source: Bloomberg, 08/11/2016