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An Analysis of Eurobonds

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Abstract

We analyse different forms of international debt mutualisation in a simple framework with a political distortion and (partial) default under adverse economic circumstances. One form is a debt repayment guarantee, which can be "unlimited" or "limited", i.e. only be invoked when the guarantee threshold is not exceeded. We also explore the "blue-red" bonds proposal, under which blue debt is guaranteed by the other countries in a union, while red debt is not guaranteed. Only a suitably chosen limited guarantee induces the government to reduce debt and raises social welfare. Making the guarantee also conditional on sufficient structural reform may stimulate reform effort. However, now a trade-off exists between extracting more reform and inducing the government to limit debt issuance.

Suggested Citation

  • Beetsma, Roel & Mavromatis, Konstantinos, 2012. "An Analysis of Eurobonds," CEPR Discussion Papers 9244, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9244
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    References listed on IDEAS

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    1. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
    2. Harald Uhlig, 2014. "Sovereign Default Risk and Banks in a Monetary Union," German Economic Review, Verein für Socialpolitik, vol. 15(1), pages 23-41, February.
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    Cited by:

    1. George Economides & Apostolis Philippopoulos & Petros Varthalitis, 2016. "Monetary Union, Even Higher Integration, or Back to National Currencies?," CESifo Economic Studies, CESifo, vol. 62(2), pages 232-255.
    2. repec:kap:openec:v:28:y:2017:i:5:d:10.1007_s11079-017-9462-z is not listed on IDEAS
    3. Cohen, Daniel & Villemot, Sébastien, 2015. "Endogenous debt crises," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 337-369.
    4. Eijffinger, S.C.W. & Kobielarz, M.L. & Uras, R.B., 2015. "Sovereign Debt, Bail-Outs and Contagion in a Monetary Union," Discussion Paper 2015-018, Tilburg University, Center for Economic Research.
    5. Paolo Canofari & Giovanni Bartolomeo & Marcello Messori, 2017. "EMU Stability: Direct and Indirect Risk Sharing," Open Economies Review, Springer, vol. 28(5), pages 847-862, November.
    6. repec:eee:streco:v:44:y:2018:i:c:p:100-114 is not listed on IDEAS
    7. repec:eee:hapoch:v1_311 is not listed on IDEAS
    8. Zarko Kalamov & Klaas Staal, 2016. "Public debt, bailouts, and common bonds," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(4), pages 670-692, August.
    9. Niels Gilbert & Jeroen Hessel & Silvie Verkaart, 2013. "Towards a Stable Monetary Union: What Role for Eurobonds?," DNB Working Papers 379, Netherlands Central Bank, Research Department.
    10. Benedikt Mihm, 2016. "Mispricing of Risk in Sovereign Bond Markets with Asymmetric Information," German Economic Review, Verein für Socialpolitik, vol. 17(4), pages 491-511, November.

    More about this item

    Keywords

    blue and red bonds; debt bias; debt guarantee; eurobonds; political distortions; social welfare; structural reform;

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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