Corporate Governance Lessons for the Sovereign Debt Crisis: Sovereign Equity

Abstract

Sovereign bonds constitute a pro-cyclical security. At times of stagnation or recession, the fixed obligations incorporated in a sovereign bond put additional fiscal pressure on governments that need to introduce austerity measures to perform on the bonds. Sovereign paper should be designed to be counter-cyclical. The distinction between debt and equity in corporate governance can be replicated at the sovereign level. States can issue sovereign equity or hybrid securities linking the payments to the rate of GDP growth of the issuer. Sovereign equity-like instruments would help governments escape fiscal retrenchment during recessions while also curbing excessive expansionary fiscal policies in time of rapid growth.

Keywords: sovereign debt crisis, sovereign debt, sovereign bonds, corporate governance, debt, equity, hybrid securities, fiscal policy, GDP, economic growth

JEL Classification: G3, H6