MNI: EU Safe Asset Plan Sees Positive Feedback-Spain Says

A Spanish proposal to transfer part of the bloc's stock of national debt into joint European Union bonds in order to create a European safe asset has received positive feedback from other member states, a Spanish official told MNI.

In a non-paper submitted to the EU seen by MNI, Spain proposes a European Sovereign Facility which in its first years would cover over one third of states' annual redemptions as well as deficits consistent with fiscal plans approved by the Commission. The ESF would also centralise debt issued by other EU bodies like the European Stability Mechanism and the EFSF.

"We need to build capacity and depth to create a safe asset and EU issuance is set to shrink in coming years," the Spanish official said.

The paper suggests that such an arrangement could go ahead with a “coalition of the willing,” but, while the official said that the non-paper has received positive feedback from some states, he did not comment on whether Germany would be willing to join what is designed to be a voluntary scheme. (see MNI: Eurozone To Urge Slightly More Fiscal Expansion - Sources)

"Germany can support this passively because it doesn't require much. It just the framework to be established, and then Germany can benefit in the long term too," the official said. 

 "The ESF would remove uncertainty over the future supply of EU debt and facilitate its inclusion in sovereign bond indices – a step estimated to increase structural demand by around 30%-40%," the non-paper states. 

If all EU states were to join the facility, the EU could issue around EUR850 billion a year. Starting with the already outstanding EU debt stock of EUR750 billion, safe asset status could be achieved within five years, according to the non-paper, citing an estimate that this would be around EUR5 trillion.

COMPENSATION

Under the plan, the EU would lend borrowed funds back to participating states, which would reap the benefits of the lower borrowing costs of a scaled-up and more liquid EU bond market. Countries with lower borrowing costs than the Commission would pay only their own yield, while any additional cost would be shared among the others, preserving incentives and delivering net efficiency gains for all, the paper states.

"We don't know how high this proposal will fly but I see it as a starting point," the official said. 

"We all agree that we need the European safe asset, but this is a concrete solid proposal."

The official also told MNI that - as with the NextGenerationEU programme - access would be conditional on complying with EU fiscal rules and stressed that the bonds would be backed both at state level as well as by the EU budget. 

EU officials told MNI that they expect the proposal to be raised by Spain at Thursday's meeting of the Eurogroup where the international role of the euro will also be on the agenda.  (See MNI SOURCES: Cheaper Oil Gives ECB Room Before Next Hike)