Conditional Eurobonds and the Eurozone Sovereign Debt Crisis
AbstractThis paper proposes that all new euro area sovereign borrowing be in the form of jointly guaranteed Eurobonds.� To avoid classic moral hazard problems and to insure the guarantors against default, each country would pay a risk premium conditional on economic fundamentals to a joint debt management agency.� This suggests that these bonds be called 'Euro-insurance-bonds'.� While the sovereign debt markets have taken increasing account of the economic fundamentals, the signal to noise ratio has been weakened by huge market volatility, so undercutting incentives for appropriate reforms and obscuring economic realities for voters.� This paper uses an econometric model to show that competitiveness, public and private debt to GDP, and the fall-out from housing market crises are the most relevant economic fundamentals.� Formula-based risk spreads based on these fundamentals would provide clear incentives for governments to be more oriented towards economic reforms to promote long-run growth than mere fiscal contraction.� Putting more weight on incentives that come from risk spreads, than on fiscal centralisation and the associated heavy bureaucratic procedures, would promote the principle of subsidiarity to which member states subscribe.� The paper compares Euro-insurance-bonds incorporating these risk spreads with other policy proprosals.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 681.
Date of creation: 29 Oct 2013
Date of revision:
Sovereign spreads; eurobonds; eurozone sovereign debt crisis; subsidiarity;
Other versions of this item:
- John Muellbauer, 2013. "Conditional eurobonds and the eurozone sovereign debt crisis," Oxford Review of Economic Policy, Oxford University Press, vol. 29(3), pages 610-645, AUTUMN.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G01 - Financial Economics - - General - - - Financial Crises
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-16 (All new papers)
- NEP-CBA-2013-11-16 (Central Banking)
- NEP-EEC-2013-11-16 (European Economics)
- NEP-MAC-2013-11-16 (Macroeconomics)
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