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Effects of Eurobonds: a stochastic sovereign debt sustainability analysis for Portugal, Ireland and Greece

Author

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  • Joris TIELENS
  • Bas VAN AARLE
  • Jan VAN HOVE

Abstract

This paper assesses the impact of Eurobonds on sovereign debt dynamics for selected European member states (Greece, Ireland and Portugal). For each member state, we produce sovereign debt fan charts of (i) a baseline scenario (no Eurobonds) and (ii) a Full-Fledged Eurobond introduction. The key building blocks of our methodology are (i) a debt framework (which embeds the traditional recursive debt equation), (ii) a vector autoregressive model to take into account and parametrise macroeconomic uncertainty and (iii) a fiscal reaction function. Conditional on the absence of moral hazard, we find Eurobonds to be a good instrument to absorb macroeconomic shocks and to diminish uncertainty over future debt forecasts; for Ireland and Portugal, we find debt to be 20 percentage points lower than under our baseline scenario, by 2020.

Suggested Citation

  • Joris TIELENS & Bas VAN AARLE & Jan VAN HOVE, 2014. "Effects of Eurobonds: a stochastic sovereign debt sustainability analysis for Portugal, Ireland and Greece," Working Papers Department of Economics ces14.10, KU Leuven, Faculty of Economics and Business, Department of Economics.
  • Handle: RePEc:ete:ceswps:ces14.10
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    References listed on IDEAS

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    Cited by:

    1. Baghdassarian, William & Mele, Gianluca & Pradelli, Juan, 2014. "Assessing public debt sustainability in Mauritania with a stochastic framework," Policy Research Working Paper Series 7088, The World Bank.

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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