In Watershed Event, Europe Unveils Plan To Securitize Sovereign Debt

Tyler Durden's picture

Less than a decade after various complex, synthetic, squared, cubed and so on securitized debt structures nearly brought down the financial system, here come "Sovereign Bond-Backed Securities."

Moments ago, the FT reported that in a watershed event for the European - and global - bond markets, Brussels is pressing for sovereign debt from across the eurozone to be "bundled into a new financial instrument and sold to investors as part of a proposal to strengthen the single currency area."

Call it securitized sovereign debt.

In the latest attempt by Europe to create a common bond market, a European Commission paper on the future of the euro seen by the Financial Times, advocates the launching of a market of “sovereign bond-backed securities” — packaging different countries’ national debt into a new asset.

The logic is simple: combine all the debt from strong and weak countries into one big pool, eliminating the outliers on both sides, then tranche it out, and sell it based on required yield returns.

Officials hope that the plans would boost demand for debt issued by governments with relatively weaker economies, and encourage banks to manage their risks better by diversifying their portfolios, while avoiding old political battles over whether the currency bloc should issue common bonds.

Why now? Because as has been Germany's intention all along, Berlin has been hoping to create a fiscally intergrated Europe (with a shadow government in Berlin of course), call it a (quasi) "fiscal union", and which is much more stable and resilient than the current iteration which is only as strong as its weakest link. Securitizing the sovereign debt resolves virtually all outstanding problems.

The commission paper is the latest in a series of efforts to kick-start integration inside the eurozone. Such integration efforts have stalled since financial markets became convinced in 2013 that the European Central Bank would not allow the eurozone to break up. The last successful integration project was the creation of an EU banking union three years ago.

There is another reason why now: over the next year, the ECB's QE, which has been instrumental to implement Draghi's "Whatever it takes" bluff, will start hiking rates and eventually unwinding its balance sheet, the world's biggest. That's when the European bond market may have its next freak out moment. As a result, Brussles and Frankfurt are hoping to preempt this potential unwind by coming up with today's "ingenious" solution. More from the FT:

Although the markets have warmed to eurozone debt since the height of the crisis, many analysts believe the sentiment is reliant on continued sovereign bond purchases by the ECB as part of its unprecedented economic stimulus programme, which shows no signs of letting up.


If the ECB were to back off on quantitative easing, some eurozone countries could again become vulnerable, and many officials have urged issuing bonds backed by all 19 eurozone countries would be the easiest way to keep borrowing costs low for underperforming economies.

Most importantly, however, Germany will be delighted that it won't have to shoulder a disproportionate risk burden than it otherwise should. Indeed, in the past, Germany has strongly resisted any “eurobond” proposal as it would mean Berlin is using its own credit strength to support the rest of the eurozone. However, under new plan "would not pool, or interfere with, national governments’ debt issuance — a red line for Berlin.

As the FT adds, the plans, which is expected to be completed by November, will be be presented by the European Commission on Wednesday as part of a broader reflection paper on the future of the euro.

What are next steps?

Brussels’ intention is that the market for securitised bonds could be established in the shorter term while talks continue on more far-reaching possibilities for Europe to develop a security that could replicate the role that US Treasury bonds play on the global market.


The paper notes that these more ambitious ideas for creating a “European Safe Asset” raise “a number of complex, legal, political and institutional questions that would need to be explored in greater detail” and that the whole issue of debt mutualisation in the eurozone “is heavily debated.”

The disclosed proposal also explains the surprisingly friendly attitude by Germany's Merkel toward Macron: after all this plan only works if Europe's top economies support it, and since for Germany sovereign debt securitization is the best possible outcome, the last thing Merkel would want is for the French to block the proposal.

The debate over the future of the eurozone has been given renewed impetus by the election of Emmanuel Macron in France, who is pushing for a common eurozone budget and central finance minister; Paris and Berlin have agreed to look jointly at reform options.


In addition to new financing instruments, the paper sets out a broader reform agenda up to 2019 and another set of more ambitious options for the period leading up to 2025.

One final question: who will buy this latest securitized product? Well, there is about $8.5 trillion in shadow debt (or, as they call it there, investments) in China which needs to be laundered into a new, pristeen security. We are confident that hundreds of otherwise insolvent Chinese banks will be delighted to step up and provide the funds needed to ignite Europe's sovereign securitization market, especially if it means they will be able to park even more "hot money" in Europe in the process.

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hedgeless_horseman's picture


...sovereign debt from across the eurozone to be "bundled into a new financial instrument and sold to investors...

So, we can forget about EuroBonds.

They are gonna jump straight to selling cat shit wrapped in dog shit.

Luc X. Ifer's picture

Selling debt for more debt, WTF?! Obviously stealing from and passing the buck to the next sucker generations.

BullyBearish's picture

i'll take SSDs for $200Trillion Alex...

Deathrips's picture

But my communist neighbor told me that the EU is a bastion of capitalized responsibility.



City_Of_Champyinz's picture

This worked out so well with Mortgages, what could possibly go wrong this time?  How much Greek/Spanish/Italian debt is included in each unit of dog shit coated cat crap?

Jim in MN's picture

Stop asking questions.  Eat, eat.

knukles's picture

Dude, that's fucked up.  Securitizing sovereigns.  Like really, really fucked up.


Jim in MN's picture

Wouldn't you like to see their collateral?


Serfs or land....hmmmm

knukles's picture

OK.  I get first dibs (collateral, as in first lein) on all the Swiss chicks

This is soooooooo stooopid. 

For each pool, you'll know the assets (collateral) and thus, the %age of the deal in each nation-state.
Some simple math and you've ... oh never mind.

Net result is the bankers make a fortune packaging and reselling the stuff.

fockewulf190's picture

Instead of a "bad bank", it's now "bad bonds". Good luck with that.

auricle's picture

Unfortunately, some fund manager will gladly park your retirement into one of these vehicles. 

BetaGap's picture

It will implode before they are ready.


F* the unelected.

Deathrips's picture

Taking fiat fractionalization to another level.





peopledontwanttruth's picture

And now for his greatest and final act the Great Wizard of Oz will perform.....

peopledontwanttruth's picture

Hey I'll sell you my mortgage for your mortgage and let's call it money and pretend we're out of debt.


GreatUncle's picture

When you start selling debt for debt, it is alrrady happening but not on such a grand scale.

The valuation of the securities is used to support how good the debt is ...

That is the debt is now self supporting forever because that is what created the securities.

So now start adding total securities to debt to see the real level of debt.

To infinity and beyond .....

logicalman's picture

If money is debt based, all that ever happens is redistribution of debt.

Then, of course, there's the 'conjured up from thin air' stuff.

When something is financialized it's fucked. Trouble is, everything is financialized.



Kaiser Sousa's picture

exactly... the Ponzi must continue by all fucking means...


Deathrips's picture






Deathrips's picture

Fractionalize those computer screen digits the slaves trade their lives for.






curbjob's picture

It's all thrown together ...

kinda like a Greek salad with Brussels sprouts and some very sauer krauts.

HRClinton's picture

European TBTF.

They've privatized profits, now it's time for a safety net to nationalize losses.

Will GS be involved, and will they flip these to their Muppets?

Uranium Mountain's picture

Elevator going down on US treasuries.  Yeilds to rise. Inflation anyone?Front run these junk bonds. 

gold rubeberg's picture

Yes, eventually. But don't be surprised if UST prices press the up button first ...

Ghordius's picture

+1, HH

the megabanks call all the time for EuroBonds. now they will craft/get a synthetic version, or, better, several synthetic versions of them

meh. as long as it keeps national/parliament/sovereign bonds "plain vanilla", the political risk is attributable, hence ok

LawsofPhysics's picture

Yes HH, and it "works" right up until the bankers and financiers need another global bailout...

Fuck 'em.  Get long sharecropping and guillotines, beat the rush!

CJgipper's picture

Ya'll got any of them "synthetic CDO's"?

Zorba's idea's picture

HAHAHAHAHAHA! Thankfully, all my Italian relatives have america. Ooops!

NumNutt's picture

Just when you thought the shit show couldn't get any crazier. They set the crazy knob to '11'.

rejected's picture

"There is another reason why now: over the next year, the ECB's QE, which has been instrumental to implement Draghi's "Whatever it takes" vow, will start hiking rates and eventually unwinding its world's biggest balance sheet." 

Who they gonna sell their garbage too?

CJgipper's picture

Probably the Federal Reserve.

Francis Marx's picture

AAA doesnt mean they are good anymore.  Days of old.

VWAndy's picture

 Is AIG still around? Good luck finding a bagholder for the BBB parts. 

  Fucking crackheads.

Safelyundergroundlul's picture

LOL ! Pair this with the European Army being worked on behind the scenes. Not looking pretty for Freedom. 

ThirdWorldNut's picture

Someone in Goldman Sachs is gonna get promoted to partner on back of this.

RagaMuffin's picture

If the EU can establish this, China gets the best of both worlds - screw da dolla and do to Europe what the EU did to Europe. Hell at this point they would not even notice the difference

order66's picture

"When the market deems a bond too risky to buy, what do you think we do with it? You think we just warehouse it on the books? No, we just repackage it with a bunch of other shit that didn't sell and put it into a CDO. This is where we take a bunch of B's, Double B's and Triple B's and put them in a pile. When the pile gets large enough, it's suddenly considered diversified. Then the whores at the rating agencies give it a 92-93% AAA rating, no questions asked."

Paul Morphy's picture

EFSF/ECB has been proposing this Eurobond for at least the last 5 years.


In theory this means that Eurozone countries will no longer have to borrow individually from "the markets".

falak pema's picture

Thank you. The French proposed this to Mutti's Germany in 2008 post Lehman crisis to avoid the INEVITABLE ripple to subsequent EU banking crisis that generated two years later the soveriegn debt spill over to support the banks in Club Med and Ireland in 2010...when all EU went belly up; as the City HF markets immediately saw it was "game up" EU (at least they thought).

But Mutti shot the Eurobonding down in the Brown hosted G20 in UK 2009 as she felt it was politically and financially not to Germany's interest... From then on Germany made money on a weak Euro and became the biggest mercantilist nation at the expense of all others.

BUT WITHOUT a NUCLEAR weapon and Army to face the new multipolar changes since Putin's Crimean play and Syrac follow on to match the US libyan caper. The military ramp up makes Germany look moar naked.

Now Mutti in Taormina standoff realises that HER GERMANY has no choices but to go to the back door Eurobonding route of "united we stand divided we fall"; under the Duck's incredible roll back of the MERCANTILIST global model of OBAMA and past NWO+ Reaganomics USA mantra of supply sider oligarchy, in which Mutti was a HUGE winner.

Changing times as Dollar protectionism exposes MUtti's mercantilist model if it loses the US and UK markets and OBLIGES her to shake hands with a reconfigured France (more competitive) and a solid EU upto the Danube to face a multipolar and dangerous world of DUck's making as he is NOW all IN for investing massively in fossil cum military games ad infinitum paradigm -- (or the petrodollar collapse which will dry the US swamp).

WItness, she is NOW aiming at India-EU trade to make the Brexit more dicey for May and her "Commonwealth united" strategy...

Paul Morphy's picture

Very good analysis and an accurate recap as to what has brought us to this point, falak. I know that the initial plan was for Eurozone members to put up the capital for this fund. Then the EFSF would use this capital/equity to borrow long term funds on behalf of the Eurozone and issue debt (bonds) in exchange for that funding.

I think you're spot on here when you say that this idea has become fashionable again because of the political temperature in the USA.

The problem is that Eurozone members have acquired even more sovereign debt levels since the plan was initially mooted all those years ago. All of that sovereign debt is still there and it still has to be repaid. So will the eisting debt be rolled up under this new plan? To me this entire concept is just a case of more can kicking.

falak pema's picture

Another GS invention... but when the US runs the biggest debt machine in the world without any obligation to others, all others try and invent a remedy that is similar to the disease...

The key is having a growth mechanism that can solve the problem over time...

Now Dat is what this is all about as the EU decouples with the Duck's petrodollar... one little step at a time.

Each step has its own fiction until a new paradigm appears to create growth

For the EU its renewables in 20 years...(YIKES!)

For the US its MOAR fossil...until hell melts to burn the world.

Full Court Lugenpresse's picture

This will finally put an end to the thing that has been holding back European debt markets: excessive transparency and clarity

economessed's picture

Finally.  Financial innovation is the solution to all real-world problems.  Europe is saved!  And as an added bonus, Venezuela will now have some decent investment opportunities to consider.

taketheredpill's picture



They just have to sell it to the German banks...oh...right. 

gregga777's picture

This development indicates that the City of London Swindlers have learned a lot from New York City's CON Street Swindlers.  Throw enough junk ponds into a pool, securitize them and voila, AAA-rated crap!!!  Then sell them to the suckers (aka the retail investors and public pension funds).

Horse Pizzle's picture

Where can Europe find investors stupid enough to purchase securitized sovereign debt of the PIIGS?  They cannot. They can throw bankers off rooftops until the banks purchase the debt.  Draghi was the enforcer for Italian (mafia) sovereign debt which is 95% owned by Italians.  Draghi promised to do "whatever it takes" after which there was a rash of banker suicides.

JerseyJoe's picture

Blended sub-prime with less than prime.   Gotta work.  LOL  

Now watch how politicized ratings get to keep bond price high on this scam.  I am sure IT debt will pull a triple A.