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Conditional Eurobonds and the Eurozone Sovereign Debt Crisis

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  • John Muellbauer

Abstract

This 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 Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 681.

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Date of creation: 29 Oct 2013
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Handle: RePEc:oxf:wpaper:681

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Keywords: Sovereign spreads; eurobonds; eurozone sovereign debt crisis; subsidiarity;

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  1. Patrick Augustin, 2012. "Sovereign Credit Default Swap Premia," Working Papers 12-10, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2011. "How Sovereign Is Sovereign Credit Risk?," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 75-103, April.
  3. Jun Pan & Kenneth J. Singleton, 2008. "Default and Recovery Implicit in the Term Structure of Sovereign "CDS" Spreads," Journal of Finance, American Finance Association, vol. 63(5), pages 2345-2384, October.
  4. Miguel A. Segoviano Basurto & Carlos Caceres & Vincenzo Guzzo, 2010. "Sovereign Spreads," IMF Working Papers 10/120, International Monetary Fund.
  5. Favero, Carlo A. & Missale, Alessandro, 2011. "Sovereign spreads in the Euro area: Which prospects for a Eurobond?," CEPR Discussion Papers 8637, C.E.P.R. Discussion Papers.
  6. Jakob von Weizsäcker & Jacques Delpla, 2011. "Eurobonds: The blue bond concept and its implications," Policy Contributions 509, Bruegel.
  7. Eser, Fabian & Schwaab, Bernd, 2013. "Assessing asset purchases within the ECB’s securities markets programme," Working Paper Series 1587, European Central Bank.
  8. Eser, Fabian & Carmona Amaro, Marta & Iacobelli, Stefano & Rubens, Marc, 2012. "The use of the Eurosystem's monetary policy instruments and operational framework since 2009," Occasional Paper Series 135, European Central Bank.
  9. Scott, K. Rebecca, 2012. "Rational habits in gasoline demand," Energy Economics, Elsevier, vol. 34(5), pages 1713-1723.
  10. Elif Arbatli & C. Emre Alper & Jiri Jonas & Anke Weber & Marc Gerard & Tidiane Kinda & Giovanni Callegari & Anna Shabunina & Andrea Schaechter & Carlos Caceres, 2012. "A toolkit for Assessing Fiscal Vulnerabilities and Risks in Advanced Economies," IMF Working Papers 12/11, International Monetary Fund.
  11. Andrew Ang & Francis A. Longstaff, 2011. "Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe," NBER Working Papers 16982, National Bureau of Economic Research, Inc.
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Cited by:
  1. Angelini, Elena & Ca' Zorzi, Michele & Forster, Katrin, 2014. "External and macroeconomic adjustment in the larger euro area countries," Working Paper Series 1647, European Central Bank.

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