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Outline of a redistribution-free debt redemption fund for the euro area

Marika Cioffi (), Pietro Rizza (), Marzia Romanelli and Pietro Tommasino ()
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Marika Cioffi: Bank of Italy

No 479, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Public debts in the euro area have increased sharply due to the economic crisis, and remain at historically high levels in several countries. In a monetary union, high-debt members represent a permanent threat to financial stability, as they are subject – even if fundamentally solvent – to significant rollover risk. Given the tight financial and economic links between member states, a liquidity crisis in one of them would trigger area-wide turmoil. While prudent fiscal policies are essential to address the legacy debt problem, it takes time for them to bring the debt back to (at least) pre-crisis levels. Against this background, the paper explores the feasibility and desirability of transferring a share of national public debts to a European Redemption Fund. In exchange, each country would transfer a yearly flow of resources to the Fund. We show that it is possible to design such a scheme so that it does not entail any ex-ante cross-country redistribution, while the euro area as a whole would benefit as the lowering of member states’ annual refinancing needs would improve financial stability. The fraction of mutualized debt would be fully redeemed over a reasonable number of years. The scheme would not jeopardize national commitment to debt reduction; if anything, market discipline would become more effective at the margin.

Keywords: Euro area; sovereign debt; debt redemption fund; financial stability (search for similar items in EconPapers)
JEL-codes: E6 H12 H60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-mac
Date: 2019-01
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