This Policy Insight discusses sovereign debt management in the euro area, where the Covid-19 crisis has caused a huge increase in such debts
Our two main conclusions are that sovereign debt externalities
remain important in the euro area, even in the new environment of
permanently lowered interest rates, and that these externalities justify
common euro area policies to deal with excessive sovereign debt
accumulation and the attendant risks to the euro area’s financial
stability. Our proposal is that a substantial part of the sovereigns
purchased by the European System of Central Banks (ESBC) – in the order
of 20% of euro area GDP – could gradually be transferred to the European
Stability Mechanism (ESM), without any transfer of default risks, which
would continue to fall on national central banks.
By rolling over these securities, rather than seeking reimbursement
from the issuers, the ESM would make them equivalent to irredeemable
bonds. These purchases would be funded by the ESM by issuing its own
securities in capital markets. In addition to the national central bank
de facto guarantees, these liabilities would be guaranteed by the ESM
large (callable) capital and by the existing member states’ guarantee,
and the ESM Triple A standing would not, therefore, be endangered. A
European ‘safe’ asset would thus be created without the drawbacks of
various other proposed schemes. By bringing a large supply of new
high-quality assets to the market, the scheme is likely to relieve the
downward pressure on interest rates in the bond markets of low
sovereign-debt euro area countries. Financial fragmentation would likely
be much reduced, though it is not likely to disappear as long as the
European Monetary Union (EMU) architecture remains incomplete.
Full article
CEPS
© CEPS - Centre for European Policy Studies
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article