Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/193528
Authors: 
Brunnermeier, Markus K.
Langfield, Sam
Pagano, Marco
Reis, Ricardo
Nieuwerburgh, Stijn Van
Vayanos, Dimitri
Year of Publication: 
2016
Series/Report no.: 
ESRB Working Paper Series 21
Abstract: 
The euro crisis was fueled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a union-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies would be at least as safe as German bunds and approximately double the supply of euro safe assets when protected by a 30%-thick junior tranche. Second, a model shows how, when and why the two features of ESBies - diversification and seniority - can weaken the diabolic loop and its diffusion across countries. Third, we propose a step-by-step guide on how to create ESBies, starting with limited issuance by public or private-sector entities.
Subjects: 
European Safe Bonds
safe assets
sovereign risk
JEL: 
E44
G01
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-95081-51-2
Document Type: 
Working Paper
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