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What makes government bonds a safe asset? This column shows that the low political and institutional risk of issuing countries and the relative size of the debt market foster a safe asset status, with the latter factor - size - reflecting the special role of the US in providing a large, deep and liquid market for government bonds. Inertia - whether the bond behaved as a safe asset in the past - is also important. Notably, the drivers of safe asset status are heterogeneous within advanced and emerging markets, with external sustainability in particular being relevant for the latter group of countries.

"Cryptocurrencies, despite them being conceptually appealing in thunderdome scenarios that may indeed materialize in a handful of failed or failing states that find themselves at the intersection of a pandemic and a terms of trade shock. Their limitation is they are funding vehicles, so don't appreciate when other investments are unwound, and also lack the liquidity to make them alternatives to core defensive assets."

As the ECB noted in a recent stablecoin research piece in an extreme-case scenario where libra coins prove as popular as Facebook, the global size of the Libra Reserve could reach almost €3tn of assets under management! In that context it's fair to say the Libra Reserve's potentially endless demand for safe assets could swiftly transform it into a self-consuming Ouroboros. Especially in the current crisis environment.