Financial markets just threatened to break the eurozone, so the idea of harnessing the power of the market and of financial engineering to guarantee the euro’s long-term viability might seem paradoxical. Realizing the idea is why eurozone sovereign debt should be spit into senior and junior tranches – "Blue Bonds" and "Red Bonds."
BRUSSELS – Financial markets almost just succeeded in breaking up the eurozone. So the idea of harnessing the power of the market and of financial engineering to guarantee the euro’s long-term viability might seem paradoxical. But this is precisely what our proposal to split eurozone sovereign debt into senior and junior tranches aims to achieve.
The senior tranches would comprise debt totaling up to 60% of the GDP of each participating country. These countries would then pool this debt and issue a joint and several guarantee. The resulting “Blue Bond” (named after the color of the European flag) would be an extremely safe and highly liquid asset, comparable in volume to United States T-bills, thereby helping the euro’s rise as an international reserve currency and ensuring low refinancing costs for the bulk of eurozone debt.
By contrast, any debt beyond 60% of GDP would have to be issued as junior “Red Bonds” under purely national responsibility. These “Red Bonds” would make borrowing beyond 60% of GDP more expensive, thereby enhancing fiscal discipline and reinforcing the targets set by the Stability and Growth Pact.
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If the US Federal Reserve raises its policy interest rate by as much as is necessary to rein in inflation, it will most likely further depress the market value of the long-duration securities parked on many banks' balance sheets. So be it.
thinks central banks can achieve both, despite the occurrence of a liquidity crisis amid high inflation.
Although Silicon Valley Bank was not deemed to be systemically important, its insolvency forced the US Federal Reserve to head off systemic contagion and exposed the inadequacy of the FDIC’s partial deposit insurance regime. The financial-stability framework adopted after the 2008 crisis obviously needs another overhaul.
considers what the bank’s failure should mean for the current financial-stability framework.
BRUSSELS – Financial markets almost just succeeded in breaking up the eurozone. So the idea of harnessing the power of the market and of financial engineering to guarantee the euro’s long-term viability might seem paradoxical. But this is precisely what our proposal to split eurozone sovereign debt into senior and junior tranches aims to achieve.
The senior tranches would comprise debt totaling up to 60% of the GDP of each participating country. These countries would then pool this debt and issue a joint and several guarantee. The resulting “Blue Bond” (named after the color of the European flag) would be an extremely safe and highly liquid asset, comparable in volume to United States T-bills, thereby helping the euro’s rise as an international reserve currency and ensuring low refinancing costs for the bulk of eurozone debt.
By contrast, any debt beyond 60% of GDP would have to be issued as junior “Red Bonds” under purely national responsibility. These “Red Bonds” would make borrowing beyond 60% of GDP more expensive, thereby enhancing fiscal discipline and reinforcing the targets set by the Stability and Growth Pact.
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