On Wednesday 23 or Thursday 24 May, the European Commission will unveil a proposal aiming to set in place a market for sovereign bond-backed securities (SBBS) within the Eurozone.
Next week, we will present an initiative authorising financial players to issue SBBS securities, which will support a greater diversification of securities portfolios, said the Commissioner for Financial Services, Valdis Dombrovskis, on Thursday 17 May, addressing the committee on economic and monetary affairs of the European Parliament.
Marco Valli (EFDD, Italy) said that this proposal, which does not involve a partial pooling of the issuance of sovereign debt in the Eurozone, could actually end up increasing financial risks and instability.
There will be no pooling, Dombrovskis acknowledged, as this is a red line for countries such as Germany and the Netherlands. However, the proposal will allow banks to stop investing heavily in sovereign securities of their countries of origin, he stressed.
The share of the exposure of a national banking system to the sovereign debt of the country of origin in relation to its total exposure to sovereign debt differs greatly between member states. It stands at just 8.3% in Luxembourg, but is as high as 61.3% in Slovenia, the Commission observes in an impact assessment accompanying the draft regulation.
The Commissioner made no secret of the fact that several member states took an extremely cautious view of this initiative. Some see it as an attempt to retable the question of the pooling of sovereign debt. Others see it as calling into question the regulatory treatment of sovereign securities, currently considered risk-free.
The Commission’s proposal, which was announced in the package of proposals to deepen Economic and Monetary Union presented by the Commission in December 2017 (see EUROPE 11920), takes its inspiration from the work of the European Systemic Risk Board, which made specific recommendations in January (see EUROPE 11950).
The pooling of sovereign securities should be weighted on the basis of the distribution key of the contributions of the Eurozone countries to the ECB, according to a draft regulation of which EUROPE has had sight. And in order for the securities to be low-risk, a tranche of 70% of SBBS securities will have ‘senior’ status, guaranteeing speedy repayment to its holder in the event of default. The risk to investors would be concentrated in particular in the remaining, lower-quality tranches (‘mezzanine’ or ‘junior’).
The Commission takes the view that creating SBBS securities would help respond to the scarcity of euro assets considered risk-free and the ECB could, if it wishes, use the securities to drive its monetary policy operations. (Original version in French by Mathieu Bion)