  Several proposals for the reform of the euro area advocate the creation of a
market in synthetic securities backed by portfolios of sovereign bonds. Most
debated are the so-called European Safe Bonds or ESBies proposed by
Brunnermeier, Langfield, Pagano,Reis, Van Nieuwerburgh and Vayanos (2017). The
potential benefits of ESBies and other bond-backed securities hinge on the
assertion that these products are really safe. In this paper we provide a
comprehensive quantitative study of the risks associated with ESBies and
related products, using an affine credit risk model with regime switching as
vehicle for our analysis. We discuss a recent proposal of Standard and Poors
for the rating of ESBies, we analyse the impact of model parameters and
attachment points on the size and the volatility of the credit spread of ESBies
and we consider several approaches to assess the market risk of ESBies.
Moreover, we compare ESBies to synthetic securities created by pooling the
senior tranche of national bonds as suggested by Leandro and Zettelmeyer(2019).
The paper concludes with a brief discussion of the policy implications from our
analysis.

Pricing of Securities;Mathematical Finance;Risk Management