29 January 2018

Financial Times: Task force urges eurozone rule change for common securities

A central bank task force has said the eurozone’s financial rules need to change if a mooted and politically charged “safe asset” to strengthen the single currency area’s banking system is to work.

The lack of a eurozone “safe asset” akin to US Treasuries emerged as a serious problem for the single currency area during the financial crisis. Weaker eurozone governments such as Greece and Ireland found investors less willing to hold their debt because of the assumed cost of bailing out their banks. But because many of those banks were heavily invested in their own governments’ debt, the whole financial system came under pressure. A eurozone safe asset would be an attempt to break this cycle because it would be backed by all 19 member states.

Holders of the safest tranche would only be bailed in if Greece, Cyprus, Portugal, Italy and Spain all defaulted completely on their obligations, the task force suggested. Brussels has yet to confirm whether it would give the safe assets the same treatment as government debt. At present, government debt has zero-capital treatment. Academics who have worked on the idea are privately confident that a solution can be found.

The task force has taken 18 months to come up with its recommendations. A group of academics first proposed the idea of a eurozone safe asset backed by sovereign bonds in 2011.

Full article on Financial Times (subscription required)

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