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

Author

Listed:
  • Matthias Bank

    ()

  • Alexander Kupfer

    ()

  • Rupert Sendlhofer

    ()

Abstract

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.

Suggested Citation

  • Matthias Bank & Alexander Kupfer & Rupert Sendlhofer, 2011. "Performance-sensitive government bonds - A new proposal for sustainable sovereign debt management," Working Papers 2011-24, Faculty of Economics and Statistics, University of Innsbruck.
  • Handle: RePEc:inn:wpaper:2011-24
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    File URL: https://www2.uibk.ac.at/downloads/c4041030/wpaper/2011-24.pdf
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    References listed on IDEAS

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    1. 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.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "A Decade of Debt," Central Banking, Analysis, and Economic Policies Book Series,in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.), Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 4, pages 97-135 Central Bank of Chile.
    3. Mayer, Thomas & Gros, Daniel, 2011. "Debt reduction without default?," CEPS Papers 4150, Centre for European Policy Studies.
    4. Paul De Grauwe, 2012. "A Fragile Eurozone in Search of a Better Governance," The Economic and Social Review, Economic and Social Studies, vol. 43(1), pages 1-30.
    5. Gustavo Manso & Bruno Strulovici & Alexei Tchistyi, 2010. "Performance-Sensitive Debt," Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1819-1854.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Sovereign debt management; government bonds; incentives; EMU; debt crisis;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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