P&M Notebook: DMOh no

The advantages are obvious — more usable collateral, a common safe asset benchmark, lower credit spreads for the periphery, some sense of joint responsibility — but the objections are formidable. The European Union has never really figured out how to persuade rich areas to consistently subsidise poor ones to the extent that happens within national borders, and committing to a common bond (even with clever structuring) makes little sense without a real fiscal union.

Also, as GlobalCapital found out last week, the debt management offices of several member states hate the idea. Now, clearly they’re self-interested to some extent — a common Eurobond puts them all out of a job — but they have plenty of operational reasons to dislike it too, ranging from complexity (the tranching part of the ‘SBBS’ proposal, which comes in senior and junior portions) to reliance on other countries to keep market access, to a general sense that actually, European sovereign debt markets are functioning well.

There are, it’s true, safe asset shortages popping up regularly, compounded by regulatory quarter-end effects for major dealers and investors. But an easier way to solve that is for the central banks of the Eurosystem to stop buying quite so much debt (or even feed some of it back to the market).

Europe, too, has a perfectly adequate common pricing benchmark, in the shape of mid-swaps. Maybe there are minor technical reasons of investor mandate and comparability that make a common cash curve like Gilts or Treasuries ‘better’ than a swaps curve, if you squint hard enough. But 1) Bunds exist, and 2) how much eurozone bond issuance is stopped or even slightly impeded by a lack of a euro-area equivalent to US Treasuries?

So don’t hold your breath for the SBBS investor presentation just yet.

The Commission’s paper was only one part of a frenetic run of European regulation in the last week. The Maltese presidency of the European Council wants to show definite progress before handing over to the United Kingdom — which, at this point, is unlikely to be much use — at the end of the month.

To that end, we got a deal on new securitization rules, as GlobalCapital predicted the previous week. There’s still some detail to thrash out, but the three main parties to the talks have agreed on all the main points — risk retention, transparency, capital hierarchies.

But beyond every plateau is another stretch of mountain to climb. Market participants warned that the next step was the review of the insurance regulation Solvency II, as well as making sure that giving securitizations the “STS” label came with enough tangible benefits in terms of capital treatment that it was worth obtaining the status.

There’s also the small matter of monetary policy to deal with. Although there are no new funds available under the ECB’s TLTRO, the funds are for a four year term, giving most eurozone banks room to focus on either building their TLAC and MREL buffers, or issuing at the long end.

Securitization doesn’t achieve either objective, and the ECB’s lukewarm purchasing programme, compared to its aggressive covered bond participation, means spreads still struggle to compete.

So, a regulatory breakthrough — but no flood of issuance yet, and another Barcelona ABS conference this week where regulation tops the agenda (eight years running).

Brexit, too, is sure to be the topic of choice. The agreement on STS securitization has left the issue of third countries to one side, pending Brexit negotiations, since far and away the largest non-EU jurisdiction likely to offer bonds to EU investors will be the UK from 2019 (or, whenever it actually leaves).

The European Securities and Markets Authority weighed in again on the topic last week, calling for an end to regulatory arbitrage in seeking the “spoils” of Brexit — countries must not seek “brass plate” or “letterbox” establishments for UK firms, and must be strict in applying the “entity of substance” rules.

Basically, firms wanting to set up in the EU will have to do so properly, with a real company fully staffed and capitalised, not just a beefed up SPV that backs out all of its trades to a UK-based parent.

The comments also play into a minor spat between Luxembourg and Ireland — both jurisdictions whose tax and disclosure regimes have led to them ‘hosting’ a huge chunk of Europe’s investment assets, often through vehicles which are no more than shell entities.

Ireland accused Luxembourg of engaging in regulatory arbitrage to try to attract some UK-domiciled assets after the Brexit vote, an accusation denied by the Grand Duchy’s financial services lobbying group. ESMA declined to specify which member states were doing the arbitraging, but watch out — the regulator is on the prowl.

GlobalCapital recently delved into Ireland's status as a financial centre a little more, with our recent roundtable on "Ireland post-Brexit", featuring the great and good of the Irish financial communities — and Eoghan Murphy, of Ireland's finance ministry. Click here for more.