Which state bonds may social insurance institutions use for their reserves in the future without risk?

GD/AD – 07/2017

European Safe Bonds

The EU Commission wants to create European Safe Bonds (ESBies) which are made up of government securities from all euro area countries. This was a topic of discussion in Brussels at the end of May as part of ‘deepening and completing the economic and monetary union’. These new bonds are reminiscent of Eurobonds, albeit there was less technical discussion about the latter. In fact, ESBies are a more concrete variation of the ‘Eurobond model’ which was largely burnt in our earlier discussions. Should this succeed in eliminating the ever-growing ‘interest rate spread’, that is, the different risk-related spreads based on the solvency of the debtor state (at least for this type of loan), it would presumably ‘revive’ the ability for already indebted countries to take on new borrowing.  

Offer to financial investors

According to the Commission, these Eurobonds could be pooled debt securities that are split up into ‘senior’ and ‘junior’ tranches. The senior tranche would be ‘safe’ in terms of repayment at maturity. ESBies would be a communitised offer to those investors who need the highest level of security and thus can no longer add many of today’s sovereign euro issues to their portfolios. The other tranche would be less safe and would be sold to investors who are more open to risk.  

However, in the opinion of the President of the German Bundesbank, Jens Weidmann, it would be ‘easier’ to offer sovereign bonds (i.e. with a clearly identifiable debtor country) using a similar two-tranche structure. If, even under these conditions, the debtor were to experience problems when called upon to pay back the particular loan, the second tranche’s maturity period could be extended according to the prevailing conditions of the debtor in question. This would make it easier for countries to sell their bonds even if they have enormous debts from the past. Many experts believe that this would provide better market prospects to those countries who would be the main beneficiaries of Eurobonds because of their poor national credit rating. 

Solvent Euro countries to lose their no-risk status

The EU Commission has already expressed the view that it would be best to remove the risk-free status of sovereign bonds. If sovereign bonds were to lose this status, even where there are no issues involving solvency, it would be an important first step towards communitising creditworthiness. This would automatically reduce the importance of the debtor country’s solvency.  


State issues have been gilt-edged up to now and have therefore been frequently used whenever large public institutions have to invest their reserves without taking any risks. Since 2010, it has been shown that this is no longer the case in many Euro countries. Removing the a priori quality of having a ‘trustee status’ from all state bonds might be considered another step towards less clearly defined debtor characteristics. 

Deeper economic and monetary union without liability union?

Given the fact that differences in interest rates and creditworthiness of euro sovereign bonds continue to widen, critics have remarked that political pressure to create a liability and creditworthiness union has not diminished. It is not free from contradictions to welcome a ‘deepening of the economic and monetary union’ but to reject its possible implications such as the start of a rapidly expanding liability and issuing union.