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GDP-indexed bonds: what are the benefits for issuing countries, investors and international financial stability?

Bruno Cabrillac (), Ludovic Gauvin and Jean-Baptiste Gossé

Quarterly selection of articles - Bulletin de la Banque de France, 2016, issue 44, 6-19

Abstract: GDP-indexed bonds in current values (GIBs) are a type of bonds that stabilises the debt ratio in the economic cycle and thus provides the issuing countries with countercyclical room for manoeuver. To date, only GDP-linked bonds with detachable warrants that yield a compensation bonus beyond some real growth thresholds have been issued and solely associated with debt restructuring. However, interest in GIBs has grown in the context of the broad current work on the contingent debt instruments which aim at strengthening the global financial safety nets by transferring part of the macroeconomic risk to private investors. This article quantifies the gains and identifies the challenges associated with GIBs. Firstly, the debt ratios of issuing countries are stabilised. Secondly, investors benefit from the catching-up in emerging economies and can deal with currency risk that extends beyond the maturities usually covered by financial markets. On this basis, we identify countries that would provide the seedbed for the development of this new type of bonds.

Keywords: GDP-Indexed bonds; sovereign debt; contingent securities (search for similar items in EconPapers)
JEL-codes: E62 G15 H63 (search for similar items in EconPapers)
Date: 2016
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