A European safe asset to complement national government bonds

Giudice, Gabriele and de Manuel Aramendía, Mirzha and Kontolemis, Zenon and Monteiro, Daniel P. (2019): A European safe asset to complement national government bonds.

Abstract

This paper expands the growing literature on common safe assets in the context of the euro area financial system by employing credit risk simulation techniques to investigate the properties of different safe asset models and their impact on national bond markets. The paper explores in particular the E-bonds model, whereby a supranational institution would raise funds in the markets and provide bilateral senior loans to Member States corresponding to a fixed proportion of GDP, complementing the issuance of national government bonds, without risks of mutualisation. The main findings are that E-bonds could reach a volume of 15 to 30% of euro area GDP with a high degree of safety while becoming the reference safe asset for the banking sector, capital markets and monetary policy operations in the euro area. As regards the impact on remaining national bonds, such volumes would be consistent with Germany maintaining its top credit rating. The average funding costs of Member States would remain broadly stable, while marginal funding costs would tend to experience limited increases, which should enhance market discipline.

• Item Type: MPRA Paper
• Language: English
• Keywords: Safe Assets; Eurozone; EMU Deepening; E-bonds; E-bills; SBBS; ESBies; Banking Union; Capital Markets Union; International Role of the Euro; Sovereign Bonds; Eurobills; Blue Bonds; Purple Bonds; Credit Risk
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt

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