Commercial banks in some euro area member states hold large amounts of sovereign debt that offer a risk premium and hence higher yields than AAA-rated bonds issued by the most creditworthy countries. In particular, banks in vulnerable countries exhibit a bias towards domestically issued...

The growing asymmetry in the size of fiscal imbalances poses a serious challenge to the macroeconomic stability of the Euro Area (EA). We show that following a contractionary shock, the current monetary and fiscal framework weakens economic growth even in lowdebt countries because of the zero...

Market liquidity is of value to both investors and issuers of securities, and is therefore a crucial factor in asset pricing. For the important asset class of Eurobonds, significant feedback from liquidity to pricing is established, and it is shown that bid-ask spreads (a proxy for market...

The growing asymmetry in the size of fiscal imbalances poses a serious challenge to the macroeconomic stability of the Euro Area (EA). We show that following a contractionary shock, the current monetary and fiscal framework weakens economic growth even in low-debt countries because of the zero...

Market liquidity is of value to both investors and issuers of securities, and is therefore a crucial factor in asset pricing. For the important asset class of Eurobonds, significant feedback from liquidity to pricing is established, and it is shown that bid-ask spreads (a proxy for market...

This paper explores how to restructure sovereign debt. It looks primarily at the Eurobonds of Zambia. This paper proposes four method for restructuring Eurobonds. For each method, it outlines the arguments that Zambia could make to justify the restructuring proposal. At the beginning of the...

The euro crisis was fueled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a union-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First,...

This paper proposes a methodology to price bonds jointly issued by a group of countries—called Eurobonds in the euro-area context. We consider two types of bonds: the first is backed by several and joint (SJG) guarantees, the second features several but not joint (SNJG) guarantees. A crucial...

Well-designed eurobonds would lower financing costs for many euro area countries while hardly or not increasing the costs for the others. These bonds should have an explicit guarantee from the ECB. These bonds could be used up to a limit of GDP (a low number of 10-25% of GDP would allow to...

The paper shows that the introduction a Eurobond together with fiscal capacity at the centre would produce macro-stabilisation benefits both for the ‘core' and ‘periphery' of the Eurozone and would also achieve a rebalancing of the policy mix away from monetary towards fiscal stimulus. To...

With public debt-to-GDP levels now set to surpass post-war records and Italy’s ratio approaching levels reached in Greece on the eve of the country’s debt restructuring in early 2012, fears of a return of the sovereign debt crisis have emerged.

The long-term fiscal and economic damage of eurobonds in a rule-based fiscal architecture - as history corroborates - would be greater than the historical challenge of the coronavirus pandemic, unless there is a political union in Europe.

The purported advantages of corona bonds over the ESM are meagre to non-existent, says Friedrich Heinemann (EconPol Europe, ZEW). The challenge we face is to contain the spread of COVID-19 while stabilising the economy and ensuring eurozone states have sufficient liquidity and the ESM is a...

The paper discusses the most noteworthy measures taken or yet to be taken by the EU to combat the coronavirus crisis. Basically, the measures fall into four categories: (i) flexible application of EU rules that could hinder member states in their strenuous efforts to save their national...

All companies, governments, states and organisations need to raise additional finance for different purposes. There are several different methods, such as bank loans, bonds, notes, structured products or new equity, available to obtain the required amount of money. The set of financial sources...

This paper evaluates four approaches to creating "safe assets" or asset portfolios for the euro area: (1) a diversified portfolio of senior tranches of sovereign debt ("national tranching"); (2) a senior security backed by a diversified pool of national sovereign debt ("ESBies"); (3) debt issued...

This paper explains and evaluates three proposals to create "safe assets" for the euro area based on sovereign bonds, in which sovereign risk is limited through diversification and some form of seniority. These assets would be held by banks and other financial institutions, replacing...

Covered bonds and senior bonds are important securities for fixed income investors. Senior bonds are unsecured, while covered bonds are secured and backed by collateral. Our results show that collateral reduces the total risk in individual bonds by more than 70%. Compared to diversified...

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...