Economics at your fingertips  

Contingent Convertible Bonds for Sovereign Debt Risk Management

Consiglio Andrea and Stavros Zenios ()
Additional contact information
Consiglio Andrea: University of Palermo, Palermo, Italy

Journal of Globalization and Development, 2018, vol. 9, issue 1, 24

Abstract: We consider convertible bonds that contractually stipulate payment standstill, contingent on a market indicator of a sovereign’s credit worthiness breaching a distress threshold. This financial innovation limits ex ante the likelihood of debt crises and imposes ex post risk sharing between creditors and the debtor. Drawing from literature on contingent contracts, neglected risks, and bank CoCo, we extend prevailing arguments in favor of sovereign CoCo (S-CoCo). We discuss issues relating to their design: which market trigger, market discipline and sovereign incentives, and errors of false alarms or missed crises, and provide supporting evidence with eurozone data and a simple simulation on the use of S-CoCo. We develop a risk management model using these instruments to trade off the expected cost for sovereign financing over a long horizon, with tail risk. The model shows how contingent bonds can improve a country’s debt risk profile. Using Greece as a case study the model illustrates improvements in expected cost vs. tail risk for the country when using contingent debt.

Keywords: conditional Value-at-Risk; contingent contracts; debt crisis; debt restructuring; GDP-indexed bonds; portfolio optimization; puttable bonds; scenario analysis; sovereign debt (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) ... -0011.xml?format=INT (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from

Access Statistics for this article

More articles in Journal of Globalization and Development from De Gruyter
Bibliographic data for series maintained by Peter Golla ().

Page updated 2019-08-25
Handle: RePEc:bpj:globdv:v:9:y:2018:i:1:p:24:n:1