20171206-NATIXIS-How_to_create_a_risk-free_euro-zone_asset__5页_652kb

Flash Economics Summary

Core Content

The document discusses the challenges and potential solutions for creating a large-scale, risk-free euro-zone asset to address the excess global demand for risk-free government bonds and restore capital mobility within the euro zone.

Main Points

Excess Demand for Risk-Free Assets

• There is still significant excess demand for government bonds perceived as risk-free in the euro zone.
• This leads to abnormally low interest rates on these bonds.
• The segmentation of risk-free and risky bonds within the euro zone results in a lack of capital mobility between member states.

Current Situation

• The euro zone currently has small-scale risk-free assets such as EIB and ESM bonds.
• Germany and the Netherlands, among others, have excess savings that are no longer being lent to other countries.

Proposed Solutions

1. Mutualisation of Public Debt

   • This involves pooling existing public debt into a single eurobond.
   • However, it is opposed by countries with low interest rates, as it would result in higher interest rates for them and transfer payments to others.
   • This option has been rejected due to political and economic resistance.

2. Synthetic Bond Approach

   • A synthetic bond could be created by combining national government bonds into a single ETF-like structure.
   • This synthetic bond would be considered risk-free due to the fiscal solvency of the euro zone as a whole.
   • However, this approach introduces a moral hazard, as a country could increase its public debt and still be considered risk-free if it is included in the synthetic bond.

3. Fiscal Discipline as a Condition

   • To mitigate the moral hazard, the creation of a synthetic bond must be accompanied by fiscal discipline.
   • This includes:
     • Binding limits on fiscal deficits.
     • Caps on the share of each country's public debt eligible for inclusion in the synthetic bond (e.g., a percentage of GDP).

Key Information

• The synthetic bond approach is the only feasible way to create a large-scale, risk-free euro-zone asset.
• This approach would help soak up excess demand for risk-free assets and restore capital mobility within the euro zone.
• The absence of capital mobility is a critical issue, as savings from low-risk countries are not being invested in high-risk ones.

Conclusion

• A large-scale, risk-free euro-zone bond is necessary to address the current imbalances in the euro zone's bond market.
• The creation of such a bond requires fiscal discipline to prevent moral hazard.
• The document emphasizes that the synthetic bond approach, combined with strict fiscal rules, is the most viable solution.

Disclaimer

• The document is intended for professionals and qualified investors only.
• It is strictly confidential and cannot be shared without prior written consent from Natixis.
• It does not constitute a financial analysis or personalized investment recommendation.
• No liability is accepted for the distribution, possession, or delivery of the document in certain jurisdictions.
• The views expressed are personal and may differ among authors.
• Natixis has not verified or conducted independent analysis of the information provided.
• The document is based on public information and is not an offer or solicitation for any transaction.