Feeling the Blues. Moral Hazard and Debt Dilution in Eurobonds Before 1914

CEPR Discussion Paper No. 9860

55 Pages Posted: 17 Apr 2014

See all articles by Rui Esteves

Rui Esteves

Graduate Institute of International and Development Studies (IHEID)

Ali Tuncer

University College London - Faculty of Social and Historical Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2014

Abstract

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

Esteves, Rui and Tuncer, Ali, Feeling the Blues. Moral Hazard and Debt Dilution in Eurobonds Before 1914 (March 1, 2014). CEPR Discussion Paper No. 9860, Available at SSRN: https://ssrn.com/abstract=2423734 or http://dx.doi.org/10.2139/ssrn.2423734

Rui Esteves (Contact Author)

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Ali Tuncer

University College London - Faculty of Social and Historical Sciences ( email )

United States

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