An Analysis of Eurobonds

Roel Beetsma and Kostas(Konstantinos) Mavromatis

No 9244, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyse different forms of international debt mutualisation in a simple framework with a political distortion and (partial) default under adverse economic circumstances. One form is 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 by the other countries in a union, while red debt is not guaranteed. Only a suitably chosen limited guarantee induces the government to reduce debt and raises social welfare. Making the guarantee also conditional on sufficient structural reform may stimulate reform effort. However, now a trade-off exists between extracting more reform and inducing the government to limit debt issuance.

Keywords: Eurobonds; Debt guarantee; Blue and red bonds; Debt bias; Political distortions; Social welfare; Structural reform (search for similar items in EconPapers)
JEL-codes: E60 E62 H60 H63 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-eec and nep-mac
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Citations: View citations in EconPapers (1)

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Journal Article: An analysis of eurobonds (2014)
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