The Search for a Euro Area Safe Asset

82 Pages Posted: 20 Mar 2018 Last revised: 2 Oct 2018

See all articles by Alvaro Leandro

Alvaro Leandro

Peterson Institute for International Economics

Jeromin Zettelmeyer

Bruegel; CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: March 2018


This paper evaluates four approaches to create "safe assets" or asset portfolios for the euro area: (1) a diversified portfolio of senior tranches of sovereign debt ("national tranching"); (2) a senior security backed by a diversified pool of national sovereign debt ("ESBies"); (3) debt issued by a senior financial intermediary, backed by a diversified pool of national debt ("E-bonds"); and (4) debt issued by a euro area budget or a leveraged wealth fund, based on member state contributions or dedicated direct revenue sources. None of these approaches envisages explicit guarantees by member states, and all could potentially produce safe assets in sufficient quantities to replace euro area sovereign bond holdings in euro area banks. At the same time, the four approaches differ across several important dimensions. A euro area budget or wealth fund could create the largest volume of safe assets, followed by ESBies, E-bonds, and national tranching. A euro area budget or wealth fund is also likely to have the lowest impact on the structure and liquidity of national bond markets, while national tranching would have the largest impact. ESBies and E-bonds occupy an intermediate position. ESBies and potentially bonds issued by a euro area budget would offer their holders greater protection from deep national defaults than the other two proposals. Both ESBies and national tranching would avoid cross-country redistribution by construction, whereas E-bonds and a euro area budget could have significant distributional consequences, depending on their design. E-bonds are unique in that they would raise the marginal cost of sovereign debt issuance at higher levels of debt, thereby exerting fiscal discipline, without necessarily raising average debt costs for lower-rated borrowers.

Keywords: Banking Crisis, ESBies, Euro crisis, safe assets, Sovereign debt

JEL Classification: F33, F36, G21, H63

Suggested Citation

Leandro, Alvaro and Zettelmeyer, Jeromin, The Search for a Euro Area Safe Asset (March 2018). CEPR Discussion Paper No. DP12793, Available at SSRN:

Alvaro Leandro (Contact Author)

Peterson Institute for International Economics ( email )

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Jeromin Zettelmeyer


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