A new synthetic euro area bond would be nearly as safe as German debt, helping the bloc avert a future crisis and breaking a vicious circle of lending by banks to their national governments, Europe’s financial risk watchdog said on Monday.
Irish central bank chief Philip Lane said packaging government debt into a new bond and selling it off in tiers would give banks an alternative form of liquid collateral.
The top tranche should be immune to all but the worst economic crises, said Lane, who led the task force designing the bond, issuance of which is likely to be years away as regulatory changes will be required.
“We think the senior bond would perform quite well, loosely speaking very close to Germany,” said Lane, who also sits on the European Central Bank’s Governing Council.
“What happens in severe scenarios?” Lane said, referring to the eurozone’s 2011/2012 crisis.
“We think the yield would have been somewhere between Germany and Finland for the senior. For the mezzanine around Italy and the junior between Greece and Portugal.”