May 3, 2018 / 12:48 PM / a year ago

ECB VP revives euro bond idea with partial state guarantee

FRANKFURT, May 3 (Reuters) - Euro zone countries might attract buyers for a common synthetic bond backed by their government debt if they agreed to take “a small first loss” in case of default, the outgoing vice-president of the European Central Bank said on Thursday.

Vitor Constancio’s suggestion was aimed at reviving a proposal for European safe bonds (ESBies) - effectively a pool of sovereign debt from all euro zone countries sold in tranches - which has met with scepticism from market participants.

“These obstacles could be overcome if, for instance, a small first-loss tranche were to be covered by public guarantee, jointly provided by member states,” Constancio said. “Such contingent liability could be limited to a reasonable level.”

But Constancio proposal was unlikely to win favour in Germany, the euro zone’s richest nation, which fears ending up footing the bill for its more indebted neighbours.

As an alternative, Constancio reiterated the idea of a securitised “e-bond” enjoying a preferred creditor status over national sovereign debt in case of default, as proposed by Mario Monti, an academic and former prime minister of Italy.

“Such a structure would be less efficient and could increase the cost of issuing the non-preferential part of national debt that is not included in the securitisation,” Constancio.

“However, this could even act as a disciplining device and would not necessarily imply an increase in the costs of the total debt issuance.” (Reporting By Francesco Canepa, editing by Larry King)

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