FRANKFURT—German insurance giant Allianz SE, one of Europe's biggest investors, is urging the region's leaders to establish an EU-sponsored bond insurer to help fiscally weaker countries that have been shut out of capital markets attract fresh funding.
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A European Union debt insurer would reduce countries' borrowing costs and make it easier for investors to calculate the risk of investing in government bonds, argues Allianz Chief Financial Officer Paul Achleitner.
Ensuring European countries access to capital markets would reduce the risk that they would default. That, in turn, would help avert a future banking crisis by reducing pressure on European lenders, the largest holders of public-sector debt in Europe. The proposal would limit investor exposure to a default to 10% of the total investment.
"That is something that I as an investor can put my hands around because I now understand that my maximum loss will be 10% of the total," Mr. Achleitner, who recently presented the idea to leaders in Berlin and Brussels, said in an interview . "I can price accordingly, i.e. my demands on the interest rates are going to be more rational and therefore more bearable for the issuer."
While the suggestion for a European bond insurer isn't new, Allianz's advocacy of the idea could help it gain traction in policy circles. The senior European officials Mr. Achleitner has discussed the idea with, including Germany's leaders, have been receptive but noncommittal, he says. One hurdle would be to overcome restrictions under EU law that prevent countries from guaranteeing one another's debt. A spokesman for the German finance ministry declined to comment.
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Allianz headquarters in Munich. The German company says insurance would reduce countries' borrowing costs.
Mr. Achleitner says Allianz, which owns Pacific Investment Management Co. in the U.S. and has about €1.5 trillion ($2.16 trillion) in assets under management, wouldn't benefit directly from the existence of a European government-bond insurer. He says that he is pushing the idea only because he thinks it would help resolve the current crisis and help avert future ones. Private-sector insurers couldn't take on the risks involved, given the huge sums at stake, making an EU-sponsored solution the only option, he says.
Under the proposal, European governments would use a portion of their planned €500 billion bailout fund—the European Stability Mechanism—to capitalize a new insurer. Countries could then issue bonds insured by the new entity, which, like the ESM itself, would have a top credit rating.
With insurance attached, the bonds would be less risky and investors would demand a lower interest rate than is currently the case, Mr. Achleitner says. That would make it much easier for countries to tap credit markets and borrow on a sustainable basis. Countries issuing the bonds would pay a premium to the insurer, based on their credit risk. That premium income would accumulate in the fund and be used to pay bondholders in the event of a default.
"If [an insurance mechanism] had existed, it could have helped avoid the situation we have seen since early last year. It would reduce taxpayer exposure to a default," says Mathias Hoffmann, a professor at the University of Zurich who has studied the issue. "There's probably no way to bail out a France or Germany or Italy or even Spain. But the risks we see with Greece, Portugal and Ireland could have been averted if we made clear this is how far European solidarity would go and how much we're willing to pay."
Nevertheless, the idea will likely be controversial in countries such as Germany, where there is strong public resistance to offering financial assistance to countries that have run up huge debts. Yet Mr. Achleitner, the former head of Goldman Sachs Group Inc. in Germany, says that the alternative to insuring debt—bailing out countries such as Greece when they can't access debt markets—is even costlier.
"The political fallout issues are less dramatic inside an insurance system than they are with every tranche of cash that you send to a needy member state," he said.
The idea is roughly based on U.S. monoline insurers, such as MBIA Inc. and Ambac Financial Group Inc., which insure municipal debt. Such companies flourished for decades, but ran into trouble during the financial crisis after diversifying away from their core business of covering municipal debt into insuring the kinds of complex financial products responsible for much of the turmoil.
Investors in European government bonds currently rely on insurance-like contracts known as credit-default swaps, or CDS, to hedge against the risk of default. Government CDS markets in Europe aren't very liquid and are widely regarded as a poor gauge of a country's creditworthiness.
"Market participants are making assumptions about political actors," Mr. Achleitner said. "That doesn't necessarily add up to meaningful interest rates."
An EU insurer would be a much better judge of risk, he argues, for the simple reason that the owner of the entity—the EU—would also determine whether a member state defaults or not.
"This the only situation I know of in the world of insurance where the insurance carrier determines if the default or damage case actually occurs," he said.
—Brian Blackstone contributed to this article.
Write to Matthew Karnitschnig at matthew.karnitschnig@wsj.com
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