Sovereign Bond-Baked Securities in EMU:Do they mean accrued safety in the European sovereign debt market or simply a way to ‘privatize’ public debt?

Costa Cabral, Nazaré (2020): Sovereign Bond-Baked Securities in EMU:Do they mean accrued safety in the European sovereign debt market or simply a way to ‘privatize’ public debt?

Abstract

The aim of this article is to verify whether the creation of safe assets (sovereign bond-backed securities, SBBS) proposed in 2012 by the so-called group of ‘euro-nomics’ is a way to promote financial safety and risk-sharing in the EMU. In particular, attention is given to the shortcomings associated with the process of securitization. This is important, because securitization was, prior to the subprime crisis, considered an innovative means of increasing safety in private debt markets. The question is whether sovereign debt is a candidate for securitization and, if so, what implications this carries over to the debt structure itself and respective contractual design. My conclusion is that the creation of SBBS really implies a ‘privatization’ of sovereign debt, with advantages to the functioning of financial markets in ‘normal’ times but with possible insufficiencies in moments of financial distress. Moreover, lessons from the subprime crisis should not be forgotten.

• Item Type: MPRA Paper
• Language: English
• Keywords: safe assets, sovereign bond-backed securities, securitization, subprime crisis, sovereign debt
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G2 - Financial Institutions and Services; H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt

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