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Performance-sensitive government bonds - A new proposal for sustainable sovereign debt management

  • Matthias Bank

    ()

  • Alexander Kupfer

    ()

  • Rupert Sendlhofer

    ()

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    We argue that current sovereign debt management lacks important incentives for governments and politicians to fulfill it in a sustainable and long-term orientated way. This paper outlines that the mechanisms to solve sovereign debt problems within the EMU are not only missing the right incentives but also setting the wrong ones. In contrast to current policy, we argue that only an instrument which is sufficiently sensitive to the performance of a country (i.e. its debt level) will motivate the players to engage in sustainable debt management. Specifically, we propose performance-sensitive government bonds (PSGB) where coupon payments are closely linked to debt policy, giving strong incentives to limit debt levels and to timely restructure the economy.

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    File URL: http://eeecon.uibk.ac.at/wopec2/repec/inn/wpaper/2011-24.pdf
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    Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2011-24.

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    Length: 37
    Date of creation: Oct 2011
    Date of revision:
    Handle: RePEc:inn:wpaper:2011-24
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    Web page: http://www.uibk.ac.at/fakultaeten/volkswirtschaft_und_statistik/index.html.en
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    1. Michael Schröder & Friedrich Heinemann & Susanne Kruse & Matthias Meitner, 2007. "Pay high in good times, pay low in bad times," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(5), pages 667-683.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "A Decade of Debt," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6222, May.
    3. Gustavo Manso & Bruno Strulovici & Alexei Tchistyi, 2010. "Performance-Sensitive Debt," Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1819-1854.
    4. Mayer, Thomas & Gros, Daniel, 2011. "Debt reduction without default?," CEPS Papers 4150, Centre for European Policy Studies.
    5. Heiner Felix Mikosch & Silke Übelmesser, 2007. "Staatsverschuldungsunterschiede im internationalen Vergleich und Schlussfolgerungen für Deutschland," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 8(4), pages 309-334, November.
    6. Paul De Grauwe, 2011. "A Fragile Eurozone in Search of a Better Governance," CESifo Working Paper Series 3456, CESifo Group Munich.
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