Feeling the blues. Moral hazard and debt dilution in Eurobonds before 1914

Rui Esteves and Ali Coskun Tuncer

No 9860, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Debt mutualisation through Eurobonds has been proposed as a solution to the Euro crisis. Although this proposal found some support, it also attracted strong criticisms as it risks raising the spreads for strong countries, diluting legacy debt and promoting moral hazard by weak countries. Because Eurobonds are a new addition to the policy toolkit, there are many untested hypotheses in the literature about the counterfactual behaviour of markets and sovereigns. This paper offers some tests of the issues by drawing from the closest historical parallel?five guaranteed bonds issued in Europe between 1833 and 1913. The empirical evidence suggests that contemporary concerns about fiscal transfers and debt dilution may be overblown, whilst creditors' moral hazard may be as much of a problem as debtors'.

Keywords: Debt dilution; Debt mutualisation; Eurobonds; Moral hazard; Pre-1913 (search for similar items in EconPapers)
JEL-codes: F34 H63 H77 N24 N44 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-cta, nep-his and nep-mac
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Journal Article: Feeling the blues Moral hazard and debt dilution in Eurobonds before 1914 (2016)
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