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Limited Liability Government Debt for the Eurozone -super-†

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  • Alistair K. L. Milne

Abstract

The Maastricht treaty, notably the article 103 prohibition on 'bail-outs', gave a prominent role to market disciplines on fiscal policy. These were not effective, failing to prevent the Euro area government debt crisis. This article suggests that these market disciplines can be made effective through issue of 'limited liability' debt (debt with a maximum debt service obligation as a proportion of GDP), together with rules constraining bank holdings of government debt and maturity structure, and a senior liquidity facility. This proposal is supported by analysis of fiscal arrangements within single currency areas and of emerging market sovereign debt restructuring. (JEL codes: E42, E62, H6 and H87) Copyright The Author 2011. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

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Bibliographic Info

Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 57 (2011)
Issue (Month): 1 (March)
Pages: 44-78

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Handle: RePEc:oup:cesifo:v:57:y:2011:i:1:p:44-78

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  1. Michael D. Bordo & Harold James, 2008. "A Long Term Perspective on the Euro," NBER Working Papers 13815, National Bureau of Economic Research, Inc.
  2. Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, number 9780521731867.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  4. Michael Chui & Prasanna Gui & Andrew G Haldane, 2000. "Sovereign liquidity crises: analytics and implications for public policy," Bank of England working papers 121, Bank of England.
  5. Milne,Alistair, 2009. "The Fall of the House of Credit," Cambridge Books, Cambridge University Press, number 9780521762144.
  6. Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, number 9780521516730.
  7. Henrik Enderlein & Johannes Lindner & Oscar Calvo-Gonzalez & Raymond Ritter, 2005. "The EU budget – how much scope for institutional reform?," Occasional Paper Series 27, European Central Bank.
  8. Stephany Griffith-Jones & Krishnan Sharma, 2006. "GDP-Indexed Bonds: Making It Happen," Working Papers 21, United Nations, Department of Economics and Social Affairs.
  9. Adrian Blundell-Wignall & Patrick Slovik, 2010. "The EU Stress Test and Sovereign Debt Exposures," OECD Working Papers on Finance, Insurance and Private Pensions 4, OECD Publishing.
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