Effects of Eurobonds: A Stochastic Sovereign Debt Sustainability Analysis for Portugal, Ireland and Greece
23 Pages Posted: 16 May 2014 Last revised: 29 May 2017
Date Written: May 1, 2014
This paper assesses the impact of Eurobonds on sovereign debt dynamics for selected European member states (Greece, Ireland and Portugal). For each member state, we produce sovereign debt fan charts of (i) a baseline scenario (no Eurobonds) and (ii) Full-Fledged Eurobond introduction. The key building blocks of our methodology are (i) a debt framework (which embeds the traditional recursive debt equation), (ii) a vector autoregressive model to take into account and parametrise macroeconomic uncertainty and (iii) a fiscal reaction function. Conditional on the absence of moral hazard, we find Eurobonds to be a good instrument to absorb macroeconomic shocks and to diminish uncertainty over future debt forecasts; for Ireland and Portugal, we find debt to be 20 percentage points lower than under our baseline scenario, by 2020.
Keywords: Eurobonds, Stability Bonds, Sovereign debt sustainability, Sovereign debt crisis, Fan charts
JEL Classification: C32, H63, H68, H81
Suggested Citation: Suggested Citation