The European Commission has set out proposals for a new class of fixed-income instrument designed to open up the European debt market and contribute to the building of a banking union within the EU.
The measure would create sovereign bond-backed securities composed of bonds issued in the 19 eurozone countries and would be designed to close the "doom loop" between banks and sovereign borrowers.
The securities, known as SBBS, would repackage national debt from across the eurozone into a new security, providing so-called safe bonds that banks would be able to buy instead of purchasing sovereign debt in their own countries. European banks' large exposure to government debt exacerbated the eurozone's sovereign debt crisis and almost led to the end of the single currency area in 2012.
"If the market for SBBS takes off, it would help the private sector better diversify risks across borders and therefore ... further weaken banks' sovereign loop," Valdis Dombrovskis, the EC's vice president for financial stability, financial services and capital markets union, told a news conference in Brussels. Currently, for every euro bond investors invest in their home country, they invest 40 cents in bonds from other member states, he said.
The EC said the securities, to be issued by private institutions, would not involve risk sharing among eurozone members, with only private investors sharing risk and possible losses. Some EU countries, such as Germany, have been concerned that they may have to foot the bill for highly indebted countries.
Analysts have said the outcome of Italy's recent elections and the formation of a populist coalition are likely to intensify German concern over the potential for risk pooling. Among the proposals floated in the run-up to the coalition's formation was to ask the European Central Bank to forgive some €250 billion of Italian debt, and Barclays said earlier in the week that the coalition's spending proposals would cost €100 billion a year, or nearly 6% of GDP.
The Commission said the move would help investment funds, insurance companies and banks to diversify their sovereign portfolios, creating more integrated financial markets. It would also reduce banks' dependence on their home markets. Dombrovskis said experts at the European Systemic Risk Board, the bloc's financial risk supervisor, had concluded that the measure would not negatively affect national bond markets.
Dombrovskis said SBBS would be subject to the same regulations as eurozone sovereign bonds, and that it would be up to the market to assess demand for the products.
"We are basically proposing to have the same zero risk weight for SBBS as we currently have for the member states," he told the press conference.
That would mean that banks would not have to hold capital against their stocks of SBBS, as is the case with sovereign bonds, although questions have been raised as to whether the zero risk weight treatment is appropriate for riskier sovereign debt in particular.
The Association for Financial Markets in Europe, a lobby group, suggested in a statement that questions remain around demand for SBBS, and it said EU legislators should consult with debt management offices, primary dealers and investors before taking the initiative further. It pointed out that investors can already build portfolios of the same bonds that would underlie SBBS, and would have more flexibility to make changes if necessary.
It also pointed to potential issues with the structure of SBBS, given that "the fixed blend of national bonds and the high contagion risks between the bloc’s countries without risk-sharing measures are likely, therefore trust in SBBS will be lowest when they are most needed in times of crisis."
German reaction was also cool, with Finance Minister Olaf Scholz saying the proposal "isn't convincing," according to Bloomberg News. Markus Ferber, vice chair of the European Parliament's economic and monetary affairs committee, was cited by Reuters as saying the next step after SBBS would be "to ask for joint liability. Therefore, SBBS are Eurobonds through the backdoor and must be stopped."
The EC also said it had launched a consultation to assess how investment firms should take environment, social and governance factors into account when giving advice to clients, as part of its sustainable action plan announced in March.
It also proposed reinforcing rules on motor insurance to ensure that victims of car accidents receive full compensation, even when an insurer is insolvent, and to ensure that motorists can access their claims history when applying for a policy, facilitating the ability to switch insurers.
The Commission also said it was putting forward new rules designed to cut red tape for small and medium-sized enterprises trying to list and issue securities and boost the liquidity of publicly listed SME shares.
