A group of experts headed by the governor of Ireland’s central bank, Philip Lane, recommends that a sovereign bond-backed securities (SBBS) market should be set up within the eurozone in order to relax the link between a country’s sovereign debt and its national banking sector.
“In principle, the design of sovereign bond-backed securities could facilitate the diversification and de-risking of sovereign bond portfolios without mutualising sovereign risks in Europe”, Lane (who will be running for ECB vice-presidency) said in the report presented to the European Systemic Risk Board (ESRB).
SBBS securities are securities composed of different levels of priority in the event of reimbursement and backed by a diversified portfolio of sovereign bonds in euro. Marketed through private contracts, they will not mutualise sovereign risks, with each state remaining responsible for the servicing of its own public debt.
In its December package aimed at deepening the Economic and Monetary Union (EMU), the Commission announced that it planned to act in spring 2018 to promote the emergence of a framework for issuance of such securities (see EUROPE 11920).
Experts say the creation of SBBS securities would be subject to several conditions. The placing in common of sovereign securities should be weighted according to the key for breakdown of contributions from countries of the eurozone to the ECB. So that securities are low risk, a 70% tranche of the security would benefit from “senior” status guaranteeing its holder has swift reimbursement in event of default. The issuance of SBBS securities could be ensured either by private companies or a public company. Initially, security issuance would be gradual, as was the case with the European Stability Mechanism, to reach volumes placed on the market of at least €1.5 trillion.
Experts note that the evolution of regulatory treatment for sovereign bonds in Europe would have an impact on the development of an SBBS securities market. Currently, a bank must not hold capital when it acquires sovereign bonds.
Any reform of such treatment that is sensitive to concentration or credit risk would “substantially enhance demand for senior SBBS”, experts say. However, they are divided over how appropriate it is to legislate upstream of the creation of a market of SBBS securities due to the impact on the sovereign securities market. (Original in French by Mathieu Bion)