DP9244 An Analysis of Eurobonds
|Author(s):||Roel Beetsma, Konstantinos Mavromatis|
|Publication Date:||December 2012|
|Keyword(s):||blue and red bonds, debt bias, debt guarantee, eurobonds, political distortions, social welfare, structural reform|
|JEL(s):||E60, E62, H60, H63|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9244|
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.