Eurobonds Past and Present: A Comparative Review on Debt Mutualization in Europe

Rui Esteves and Tunçer Ali Coşkun
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Tunçer Ali Coşkun: University College London, London, UK

Review of Law & Economics, 2016, vol. 12, issue 3, 659-688

Abstract: This paper reviews the economic and historical literature on debt mutualization in Europe with reference to pre-1914 guaranteed bonds and the current Eurobonds debate. We argue that, notwithstanding the differences in scale and nature, debt mutualization solutions similar to Eurobonds were tried before, and the closest historical examples to the present debate are the pre-1914 guaranteed bonds. We highlight three key characteristics of debt mutualization, which are apparent both in the current debate and in history: moral hazard, debt dilution and conditionality. We show that the fears about short-run dilution and moral hazard were not unknown to pre-1914 market participants. These problems were partly addressed by mechanisms of conditionality such as international financial control. The historical evidence suggests that the dilution of outstanding obligations may be overplayed in the current debate. On the contrary, creditors’ moral hazard (ignored in current debt mutualization proposals) was as problematic as the usual debtor’s moral hazard –especially when the groups of countries guaranteeing the bonds and the creditor nations did not overlap entirely.

Keywords: debt mutualization; debt dilution; moral hazard; conditionality; pre-1914 (search for similar items in EconPapers)
JEL-codes: F34 H63 H77 N24 N44 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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DOI: 10.1515/rle-2016-0047

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