Securitization of eurozone sovereign debt – European “safe bonds”
An open letter written last fall by a group of academics proposed a simple securitization structure of the eurozone sovereign debt. At the time it did not get a great deal of traction, but as ESM comes online, it’s an idea worth some consideration.
First of all the group points out the interconnectedness of sovereign credit and bank credit in Europe. Since the European credit markets are dominated by loans as opposed to the US where corporate bond markets are well developed, tight credit conditions in the banking system can have enormous implications for economic growth in the eurozone. At the same time banks hold tremendous amounts of sovereign bonds as well as each others’ debt. This tight feedback loop between governments and banks creates a potential for rapid crisis escalation.
Source: Euro-nomics group