Eurobonds : A Quantitative Analysis of Joint-Liability Debt
This paper assesses the consequences of implementing a joint liability debt system in a two-country small open economy model. With joint liability a default of one country makes the other participant liable for its debt. The results highlight a tra...
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| Format: | Working Paper |
| Language: | English |
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World Bank, Washington, DC
2019
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| Online Access: | http://documents.worldbank.org/curated/en/124101568645370178/Eurobonds-A-Quantitative-Analysis-of-Joint-Liability-Debt http://hdl.handle.net/10986/32425 |
| Summary: | This paper assesses the consequences of
implementing a joint liability debt system in a two-country
small open economy model. With joint liability a default of
one country makes the other participant liable for its debt.
The results highlight a trade-off between the contagion
risk, in the sense that this instrument may push some member
states to default even though they are individually solvent,
and cheaper access to credit on average, since lenders are
at risk only if no participating sovereign is willing to
service the debt. The findings suggest that the welfare
consequences of this policy proposal hinge critically on the
timing of its introduction: Introducing such instruments at
the peak of the Eurozone crisis would have helped the
Periphery and harm the Core member states, while its
adoption during normal times has the potential to make all
participants better-off. |
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