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The Search for a Euro Area Safe Asset

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  • Leandro, Alvaro
  • Zettelmeyer, Jeromin

Abstract

This paper evaluates four approaches to create "safe assets" or asset portfolios for the euro area: (1) a diversified portfolio of senior tranches of sovereign debt ("national tranching"); (2) a senior security backed by a diversified pool of national sovereign debt ("ESBies"); (3) debt issued by a senior financial intermediary, backed by a diversified pool of national debt ("E-bonds"); and (4) debt issued by a euro area budget or a leveraged wealth fund, based on member state contributions or dedicated direct revenue sources. None of these approaches envisages explicit guarantees by member states, and all could potentially produce safe assets in sufficient quantities to replace euro area sovereign bond holdings in euro area banks. At the same time, the four approaches differ across several important dimensions. A euro area budget or wealth fund could create the largest volume of safe assets, followed by ESBies, E-bonds, and national tranching. A euro area budget or wealth fund is also likely to have the lowest impact on the structure and liquidity of national bond markets, while national tranching would have the largest impact. ESBies and E-bonds occupy an intermediate position. ESBies and potentially bonds issued by a euro area budget would offer their holders greater protection from deep national defaults than the other two proposals. Both ESBies and national tranching would avoid cross-country redistribution by construction, whereas E-bonds and a euro area budget could have significant distributional consequences, depending on their design. E-bonds are unique in that they would raise the marginal cost of sovereign debt issuance at higher levels of debt, thereby exerting fiscal discipline, without necessarily raising average debt costs for lower-rated borrowers.

Suggested Citation

  • Leandro, Alvaro & Zettelmeyer, Jeromin, 2018. "The Search for a Euro Area Safe Asset," CEPR Discussion Papers 12793, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12793
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    References listed on IDEAS

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    1. Robin Greenwood & Dimitri Vayanos, 2014. "Bond Supply and Excess Bond Returns," Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 663-713.
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    Cited by:

    1. Alogoskoufis, Spyros & Langfield, Sam, 2018. "Regulating the doom loop," ESRB Working Paper Series 74, European Systemic Risk Board.

    More about this item

    Keywords

    Banking Crisis; ESBies; Euro crisis; safe assets; Sovereign debt;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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