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Germany pours cold water on Europe's bond-backed 'safe assets'
January 27, 2017 / 10:12 AM / 9 months ago

Germany pours cold water on Europe's bond-backed 'safe assets'

BERLIN/BRUSSELS (Reuters) - Germany voiced scepticism on Friday about a European Union proposal to create “safe” assets backed by euro zone sovereign bonds, arguing there are better ways to break the link between banks and governments that exacerbated the financial crisis.

The idea of a “synthetic” euro zone bond -- effectively a portfolio of different government bonds -- was aimed at overcoming German resistance to the issue of joint debt.

But a spokeswoman for Germany’s finance ministry poured cold water on the proposal on Friday, questioning whether there would be demand for the junior tranches of the new asset.

“It is doubtful whether there is sufficient demand for such structured securities, especially in crisis situations,” she said.

The European Systemic Risk Board floated the idea of the pooled debt last year. It would provide banks with a safe asset to use as collateral so they can reduce their exposure to their own government’s debt.

The ESRB, which has been working with the European Commission, is surveying market participants about the idea, with the consultation due to close on Friday.

“We find this concept useful since it helps to address the issue of bank-sovereign loops,” European Commission Vice President Valdis Dombrovskis said on Friday.

The German government spokeswoman said a simpler way to break the link between lenders and governments would be to eliminate the preferential treatment of sovereign bonds, by forcing banks to hold capital against them and introducing a cap on exposures to individual states.

“A move away from the privilege of government bonds would be an important step in reducing concentration risks (and ‘home bias’),” the spokeswoman said in a statement.

The Vice President of the European Central Bank, Vitor Constancio, has long dismissed that option, saying capping banks’ holdings of sovereign bonds could wipe trillions of euros off their capital.

Reporting by Jan Strupczewski and Francesco Guarascio in Brussels; Matthias Sobolewski and Gernot Heller in Berlin; Writing by Francesco Canepa in Frankfurt; Editing by Larry King

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