IDEAS home Printed from https://ideas.repec.org/p/hlj/hljwrp/37-2012.html
   My bibliography  Save this paper

Market-based Eurobonds Without Cross-Subsidisation

Author

Listed:
  • Manasa Gopal

    (Birla Institute of Technology & Science, Pilani)

  • Markus Pasche

    () (Friedrich Schiller University Jena, School of Economics and Business Admistration)

Abstract

Most current Eurobond proposals imply substantial cross-subsidisation since some countries partially pay the risk premia for others, thus creating moral hazard and disincentives for fiscal discipline. We suggest, instead, to use standard technologies of financial intermediation like pooling and collateralizing risks. The proposed Eurobond system decreases the costs for all participating nations which is Pareto improving. Since collateral requirements are calculated on individual risk, we eliminate cross-subsidisation. It is essential for the model that a significant fraction of governmental bonds is still issued individually since the model utilizes the risk perception abilities and disciplinating functions of the private capital market. We also discuss institutional issues of possible implementations.

Suggested Citation

  • Manasa Gopal & Markus Pasche, 2012. "Market-based Eurobonds Without Cross-Subsidisation," Global Financial Markets Working Paper Series 2012-37, Friedrich-Schiller-University Jena.
  • Handle: RePEc:hlj:hljwrp:37-2012
    as

    Download full text from publisher

    File URL: http://pubdb.wiwi.uni-jena.de/pdf/wp_hlj37-2012.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2005. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2213-2253, October.
    2. Tim Oliver Berg & Kai Carstensen & Hans-Werner Sinn, 2011. "Was kosten Eurobonds?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 64(17), pages 25-33, September.
    3. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
    4. Sudheer Chava & Catalina Stefanescu & Stuart Turnbull, 2011. "Modeling the Loss Distribution," Management Science, INFORMS, pages 1267-1287.
    5. Adrian Blundell-Wignall & Patrick Slovik, 2011. "A Market Perspective on the European Sovereign Debt and Banking Crisis," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2010(2), pages 9-36.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pasche, Markus, 2017. "ESBies as a Basis for a TARGET2 Settlement Mechanism," MPRA Paper 83012, University Library of Munich, Germany.

    More about this item

    Keywords

    sovereign debt; Eurobond; collateral; pooling; cross-subsidisation;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hlj:hljwrp:37-2012. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Fahrholz). General contact details of provider: http://www.gfinm.de .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.