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Market-based Eurobonds Without Cross-Subsidisation

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Author Info

  • Manasa Gopal

    (Birla Institute of Technology & Science, Pilani)

  • Markus Pasche

    ()
    (Friedrich Schiller University Jena, School of Economics and Business Admistration)

Abstract

Most current Eurobond proposals imply substantial cross-subsidisation since some countries partially pay the risk premia for others, thus creating moral hazard and disincentives for fiscal discipline. We suggest, instead, to use standard technologies of financial intermediation like pooling and collateralizing risks. The proposed Eurobond system decreases the costs for all participating nations which is Pareto improving. Since collateral requirements are calculated on individual risk, we eliminate cross-subsidisation. It is essential for the model that a significant fraction of governmental bonds is still issued individually since the model utilizes the risk perception abilities and disciplinating functions of the private capital market. We also discuss institutional issues of possible implementations.

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File URL: http://pubdb.wiwi.uni-jena.de/pdf/wp_hlj37-2012.pdf
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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena in its series Global Financial Markets Working Paper Series with number 2012-37.

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Date of creation: 2012
Date of revision:
Handle: RePEc:hlj:hljwrp:37-2012

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Web page: http://www.gfinm.de

Related research

Keywords: sovereign debt; Eurobond; collateral; pooling; cross-subsidisation;

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  1. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2004. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market," NBER Working Papers 10418, National Bureau of Economic Research, Inc.
  2. Scholtens, Bert & Hameeteman, Daphne, 2003. "Joint default probabilities and country risk," Research Report 03E41, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  3. Adrian Blundell-Wignall & Patrick Slovik, 2010. "A Market Perspective on the European Sovereign Debt and Banking Crisis," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2010(2), pages 9-36.
  4. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
  5. Sudheer Chava & Catalina Stefanescu & Stuart Turnbull, 2011. "Modeling the Loss Distribution," Management Science, INFORMS, vol. 57(7), pages 1267-1287, July.
  6. Tim Oliver Berg & Kai Carstensen & Hans-Werner Sinn, 2011. "Was kosten Eurobonds?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 64(17), pages 25-33, 09.
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