Safe haven assets are expected to preserve value during a financial crisis. Economic actors perceive safe haven assets through the filter of their own needs and experience. These assets differ in liquidity and susceptibility to risk factors and take various forms such as cash, US Treasury securities, repurchase agreements, gold, platinum, real estate and others. History and reputation of safe assets also play an important role in selection.

The government and financial sector are the main producers of safe haven assets, which places constraints on the issue of the said assets. Governments issue bonds, while the financial sector of the country produces more complex and short-term instruments. Therefore, financial development, fiscal capacity of the governments and the track record of the central banks are the decisive factors for investors when choosing a safe haven for their assets, which led historically to the predominant role of a small number of countries in the systemic crisis scenarios.



Caballero, Farhi and Gourinchas claim, in their article The Safe Assets Shortage Conundrum, that the collective growth rates of the advanced economies which produce safe assets have been lower than the global growth rate. Hence, the supply of safe haven assets has not kept up with the global demand.  Furthermore, if the demand for this type of assets is proportional to global output, safe assets shortage will be a permanent feature of the global economy.

This shortage manifests in two related ways. The price of the safe assets increases, while the safe interest rates decline, which has been the case for the last 30 years. Additionally, as the authors point out, in the years leading to the global financial crisis of 2008, assets previously deemed not very safe or unknown made up for the global shortage. This category included sovereign bonds of fiscally weaker states like Greece, Italy, Spain, AAA-rated mortgage-backed securities of the private sector, and government-backed enterprises like Fannie Mae and Freddie Mac.



When the financial system imploded in 2008, the demand for the traditional safe assets shot up rapidly, while their supply contracted. The interest rates declined steeply and reached their effective lower bound – the rate at which cash becomes more attractive to investors than financial assets, so it does not get pushed down further. This process should restore equilibrium to the safe asset markets.

If the interest rates of the safe assets remain relatively high, the economy starts operating below its capacity and slows down as investors prefer safety to riskier investments. The problem of the global economy today is that the interest rates of the safe assets remain near the lower bound, which leaves very little space for sudden downswings of the global economy. The authors even identify the safe assets shortage as the key point of fragility of the global financial system.



From this perspective the key long term challenge for the global economy is the reduction of demand for safe assets. The authors identify several ways that could lead to this goal. One possibility is the appreciation of the currency of the safe asset producing country, especially US dollar. The supply of safe assets could be increased by public debt issuance and by production of private safe assets. Finally, changes in regulation and central bank’s asset purchasing and global risk sharing could contribute to lower the global demand for safe assets.

The downside of the appreciation of the currency of the safe asset producer is, of course, the decline of competitiveness of their products on the global market, exacerbating the crisis. Issuance of public debt can face opposition in form of fiscal rules or limits to debt-to-GDP ratio, while central banks’ policies may be reluctant to introducing new safe havens that remove large sums from markets.

With the recent explosion of fintech innovation, the private sector has an opportunity to produce new types of safe assets that will win the trust of investors. Their proof of quality will have to go well beyond the AAA rating of the obscure financial instruments that were obliterated in the panic of 2008. They will have to excel in real financial environment and find approval in the eyes of private investors as well as financial authorities.

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David Prezelj
David Prezelj

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