When a few weeks before the adoption of the Commission proposal I first heard about Esbies, for the fraction of a second involuntarily the image of a yellow frisbee took shape in my mind. I discarded the thought right away as the Commission’s DG FISMA obviously does not produce plastic toys. Instead – the reader might have guessed – we are dealing with the acronym of a financial instrument imagined by the aforementioned institution called “Sovereign Bond Backed Securities” (SBBS).
The proposed SBBS are a new asset class with an underlying portfolio composed of sovereign bonds from all Eurozone Member States with a fixed composition key based on the capital contribution of the Eurozone area Member States to the ECB. The instrument is not brought to life by the European Union itself but subject to the appetite of market forces to create, sell and buy such instruments.
According to the Commission’s proposal in practice a private sector entity would buy sovereign bonds issued by Eurozone Member States and bundle them together into higher or lower risk securities. Investors into each tranche would get a different seniority in the case of losses.
The legislative proposal also looks into improving the capital requirements and eligibility for liquidity coverage and collateral.
The Commission’s aim is twofold:
- For one SBBS are supposed to offer to investors and in particular to banks the possibility to invest in sovereign debt beyond their national home market via a diversified ready made financial instrument. Indeed with the past financial crisis, banks’ home bias has become painstakingly obvious with the disastrous consequences brought by the link between the fates of banks and public finances of the Member States they call their own. It also aims at reducing financial risk by spreading it more largely beyond national borders. In that sense it is a classical financial stability measure in the vein of the banking union.
- For two it is also a capital markets union project as it aims at creating more of a single financial market for low risk and liquid assets as well as integrating and diversifying these markets.
As the above makes it clear, these are not the Eurobonds opposed by a number of Member States as there is no risk sharing component for them. Gains and losses are exclusively taken by the investors in the instrument. This said, judgment by financial markets is still out and as the saying goes on the other side of the Channel: The proof of the pudding is in the eating.
By Antoine Kremer, ABBL & ALFI Head of European Affairs