AbstractThis paper develops a market-based approach to implement so called Eurobonds, i.e. common sovereign debt securities of European Monetary Union (EMU) countries. By applying an asset-backed security (ABS) approach positive implications of a common bond can be achieved and negative incentives (e.g. moral hazard) can be prevented. Within an ABS structure a special purpose vehicle (SPV) buys a portfolio of EMU countries debt instruments (pooling) and then issues a set of subordinated Eurobonds with varying risk and rating (tranching). By pooling and tranching the default risk is concentrated in one part of the capital structure, resulting in a large share of less risky securities and overall risk premia reduction. A fraction of the cash flows from the SPV to the countries is diverted to a trust fund, which covers the first losses in case of a country default. By contrast to propositions on Eurobonds made so far, our proposal has one major advantage: All EMU countries can benefit from participating in the ABS-structure. These benefits are driven by the following reasons: Firstly, we only introduce partial liability (10 % of initial notional) instead of joint liability in order to limit moral hazard. Secondly, interest gains are distributed among all participating and not defaulting countries. Our simulation study shows that on average all EMU member states - both high rated and low rated countries - gain by taking part in a Eurobond ABS due to the implied diversification and tranching effects. Average savings range between 8 % and 33 % of the total credit amount. Nonetheless, in the worst case scenario, there is a probability of a disprofit ranging between 5.5 % and 0 %. In our simulation Germany and Greece represent the two opposite ends of the range and therefore serve as example in the discussion.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Trier, Department of Economics in its series Research Papers in Economics with number 2011-09.
Length: 42 pages
Date of creation: 2011
Date of revision:
Eurobonds; EMU; asset-backed securities (ABS); financial instruments; indebtedness;
Find related papers by JEL classification:
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paulo Horta & Carlos Mendes & Isabel Vieira, 2008. "Contagion effects of the US Subprime Crisis on Developed Countries," CEFAGE-UE Working Papers 2008_08, University of Evora, CEFAGE-UE (Portugal).
- Bauer, Christian & Herz, Bernhard & Hoops, Stefan, 2008. "A Cheap Lunch for Emerging Markets: Removing International Financial Market Imperfections with Modern Financial Instruments," World Development, Elsevier, vol. 36(9), pages 1514-1530, September.
- Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2003.
"The unholy trinity of financial contagion,"
13878, University Library of Munich, Germany.
- Sergio Mayordomo & Juan Ignacio Peña & Eduardo S. Schwartz, 2009. "Towards a Common European Monetary Union Risk Free Rate," NBER Working Papers 15353, National Bureau of Economic Research, Inc.
- Ingo Fender & Janet Mitchell, 2005.
"Structured finance: complexity, risk and the use of ratings,"
BIS Quarterly Review,
Bank for International Settlements, June.
- Ingo Fender & Janet Mitchell, 2005. "Structured finance : complexity, risk and the use of ratings," Financial Stability Review, National Bank of Belgium, vol. 3(1), pages 127-135, June.
- Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Sources of contagion: is it finance or trade?," Journal of International Economics, Elsevier, vol. 54(2), pages 293-308, August.
- Nicholas Economides & Roy C. Smith, 2011.
"Trichet Bonds to Resolve the European Sovereign Debt Problem,"
11-05, New York University, Leonard N. Stern School of Business, Department of Economics.
- Nicholas Economides & Roy C. Smith, 2011. "Trichet Bonds To Resolve the European Sovereign Debt Problem," Working Papers 11-01, NET Institute.
- Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-84, December.
- Federico Sturzenegger & Jeromin Zettelmeyer, 2007. "Debt Defaults and Lessons from a Decade of Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262195534, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matthias Neuenkirch).
If references are entirely missing, you can add them using this form.