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Market-based Eurobonds Without Cross-Subsidisation

Manasa Gopal and Markus Pasche ()
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Manasa Gopal: Birla Institute of Technology & Science, Pilani

No 2012-37, Global Financial Markets Working Paper Series from Friedrich-Schiller-University Jena

Abstract: Most current Eurobond proposals imply substantial cross-subsidisation since some countries partially pay the risk premia for others, thus creating moral hazard and disincentives for fiscal discipline. We suggest, instead, to use standard technologies of financial intermediation like pooling and collateralizing risks. The proposed Eurobond system decreases the costs for all participating nations which is Pareto improving. Since collateral requirements are calculated on individual risk, we eliminate cross-subsidisation. It is essential for the model that a significant fraction of governmental bonds is still issued individually since the model utilizes the risk perception abilities and disciplinating functions of the private capital market. We also discuss institutional issues of possible implementations.

Keywords: sovereign debt; Eurobond; collateral; pooling; cross-subsidisation (search for similar items in EconPapers)
JEL-codes: E62 E63 H63 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-eec, nep-mac and nep-rmg
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