Lagarde open to combining euro zone bonds in a common asset

BRUSSELS (Reuters) - The euro zone should consider issuing a financial instrument that bundles together bonds from its member countries, to attract more investors and strengthen the global role of the euro, the future head of the European Central said on Wednesday.

Christine Lagarde, the next president of the European Central Bank, speaks to the European Parliament's Economic and Monetary Affairs Committee in Brussels, Belgium September 4, 2019. REUTERS/Francois Lenoir

In a hearing in the European Parliament, Christine Lagarde suggested such an instrument could work as a safe haven for global investors and would increase the offer of high-rated securities in the bloc by combining various sovereign bonds with different ratings.

Triple-A bonds account for only about a quarter of the bonds issued by all 19 euro zone countries, compared with about half before the financial crisis. Just four euro zone countries -- Austria, Germany, Luxembourg and the Netherlands -- carry a triple A, the highest rating.

Lagarde said the euro zone would benefit from a larger offer of safe assets that could rival that of the United States. The United States issues more than twice as many safe assets as the euro zone, as a ratio of economic output.

Lagarde also said such a common safe asset would facilitate monetary policy.

“A common sovereign safe asset could further contribute to a more efficient implementation of monetary policy,” she said. “Such an asset would avoid fragmentation and thereby contribute to a smooth transmission of the single monetary policy.”

Plans for common bond issuance by the euro zone countries have repeatedly failed in past years. The countries with top-rated securities fear such a move would increase their debt-servicing costs and favor less thrifty countries.

The debate was re-opened in July, though, by the head of the Eurogroup of euro zone finance ministers, Mario Centeno. He has set up working groups to overcome the stalemate by the end of the year.

The idea of a euro zone safe bond has also figured in the wider debate over reducing the global dominance of the dollar, after U.S. sanctions against Iran showed EU states they have little leverage to help their companies continue to trade with Iran.

The dollar remains by far the largest reserve currency worldwide, distantly followed by the euro. It also prevails in international payments and loans, making EU companies reluctant to challenge U.S. sanctions, for fear of losing access to the U.S. market.

Lagarde said a safe asset would strengthen the international role of the euro, especially if it came along with stronger capital markets and payment systems in the bloc.

She added, however, that such an instrument would need to be explored for the mid- or long-term, because it was “not strictly necessary” at the moment and remained politically sensitive.

Reporting by Francesco Guarascio @fraguarascio; editing by Larry King