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How S&P Global Ratings would assess European "Safe" Bonds (ESBies)

How S&P Global Ratings would assess European "Safe" Bonds (ESBies)

European safe bonds (ESBies) have been proposed as a tool to increase the supply of 'AAA' rated euro-denominated assets and reduce systemic risks from banks' large holdings of bonds issued by their respective sovereign governments. But S&P believes that ESBies will probably reduce the supply of 'AAA' rated assets instead, since some 'AAA' rated sovereign bonds are likely to be repackaged into lower-rated ESBies. Given the lack of diversification of the sovereign bond portfolio underlying ESBies, and the high correlation of eurozone sovereign default risk, S&P would likely rate ESBies in the lower half of the investment-grade category.