An analysis of eurobonds

Roel Beetsma and Kostas(Konstantinos) Mavromatis

Journal of International Money and Finance, 2014, vol. 45, issue C, 91-111

Abstract: We analyse different forms of debt mutualisation in a union of countries. One country suffers from a political distortion and may resort to (partial) debt default. We consider a debt repayment guarantee, which can be “unlimited” or ”limited”, i.e. only be invoked when the guarantee threshold is not exceeded. We also explore the ”blue–red” bonds proposal, under which blue debt is guaranteed, while red debt is not guaranteed. Only a suitably chosen limited guarantee induces the government to reduce debt and raises union welfare. This result is upheld under the time-consistent solution when there are costs to the rest of the union of not providing financial rescue. Making the guarantee also conditional on sufficient structural reform may in addition stimulate reform effort, thereby raising union welfare.

Keywords: Eurobonds; Debt guarantee; Blue and red bonds; Structural reform; Default; Union (search for similar items in EconPapers)
JEL-codes: E60 E62 H60 H63 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Working Paper: An Analysis of Eurobonds (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:45:y:2014:i:c:p:91-111

DOI: 10.1016/j.jimonfin.2014.03.002

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