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Market-based Eurobonds Without Cross-Subsidisation

Author

Listed:
  • Manasa Gopal

    (Birla Institute of Technology & Science, Pilani)

  • Markus Pasche

    (Friedrich Schiller University Jena, School of Economics and Business Admistration)

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.

Suggested Citation

  • Manasa Gopal & Markus Pasche, 2012. "Market-based Eurobonds Without Cross-Subsidisation," Global Financial Markets Working Paper Series 2012-37, Friedrich-Schiller-University Jena.
    • Handle: RePEc:hlj:hljwrp:37-2012
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    File URL: http://pubdb.wiwi.uni-jena.de/pdf/wp_hlj37-2012.pdf
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    References listed on IDEAS

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    Cited by:

    1. Pasche, Markus, 2017. "ESBies as a Basis for a TARGET2 Settlement Mechanism," MPRA Paper 83012, University Library of Munich, Germany.
    2. Alexandra M.D. Hild & Bernhard Herz & Christian Bauer, 2014. "Structured Eurobonds: Limiting Liability and Distributing Profits," Journal of Common Market Studies, Wiley Blackwell, vol. 52(2), pages 250-267, March.

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    More about this item

    Keywords

    sovereign debt; Eurobond; collateral; pooling; cross-subsidisation;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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