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Tax-backed Bonds--A National Solution to the European Debt Crisis

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  • Philip Pilkington
  • Warren Mosler

Abstract

The root of Europe's sovereign debt crisis can be found in the fact that investors are concerned that countries in the periphery might default, causing them to demand a higher yield on government bonds. What's needed is a way of giving peripheral debt a high degree of safety while allowing peripheral countries to remain users of the euro. A simple solution to this problem would be for peripheral countries to begin issuing a new type of government debt: the "tax-backed bond." Tax-backed bonds would be similar to current government bonds except that they would contain a clause stating that if the country failed to make its payments when due--and only if this happens--the bonds would be acceptable to make tax payments within the country in question. This tax backing would set an absolute floor below which the value of the asset could not fall, assuring investors that the bond is always "money good," leading to lower bond rates and thus ensuring that peripheral countries would not be driven to default.

Suggested Citation

  • Philip Pilkington & Warren Mosler, 2012. "Tax-backed Bonds--A National Solution to the European Debt Crisis," Economics Policy Note Archive 12-04, Levy Economics Institute.
  • Handle: RePEc:lev:levypn:12-04
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    Cited by:

    1. Dimitri B. Papadimitriou & Michalis Nikiforos & Gennaro Zezza, 2015. "Greece: Conditions and Strategies for Economic Recovery," Economics Strategic Analysis Archive sa_gr_5_15, Levy Economics Institute.
    2. Philip Pilkington, 2013. "The Continued Relevance of Tax-backed Bonds in a Post-OMT Eurozone," Economics Policy Note Archive 13-10, Levy Economics Institute.

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