Feeling the Blues. Moral Hazard and Debt Dilution in Eurobonds Before 1914
CEPR Discussion Paper No. 9860
55 Pages Posted: 17 Apr 2014
Date Written: March 1, 2014
Debt mutualisation through Eurobonds has been proposed as a solution to the Euro crisis. Although this proposal found some support, it also attracted strong criticisms as it risks raising the spreads for strong countries, diluting legacy debt and promoting moral hazard by weak countries. Because Eurobonds are a new addition to the policy toolkit, there are many untested hypotheses in the literature about the counterfactual behaviour of markets and sovereigns. This paper offers some tests of the issues by drawing from the closest historical parallel — five guaranteed bonds issued in Europe between 1833 and 1913. The empirical evidence suggests that contemporary concerns about fiscal transfers and debt dilution may be overblown, whilst creditors' moral hazard may be as much of a problem as debtors'.
Keywords: Debt dilution, Debt mutualisation, Eurobonds, Moral hazard, Pre-1913
JEL Classification: F34, H63, H77, N24, N44
Suggested Citation: Suggested Citation