Outline of a Redistribution-Free Debt Redemption Fund for the Euro Area

31 Pages Posted: 6 Aug 2019

Date Written: February 4, 2019

Abstract

Public debts in the euro area have increased sharply due to the economic crisis, and remain at historically high levels in several countries. In a monetary union, high-debt members represent a permanent threat to financial stability, as they are subject – even if fundamentally solvent – to significant rollover risk. Given the tight financial and economic links between member states, a liquidity crisis in one of them would trigger area-wide turmoil. While prudent fiscal policies are essential to address the legacy debt problem, it takes time for them to bring the debt back to (at least) pre-crisis levels. Against this background, the paper explores the feasibility and desirability of transferring a share of national public debts to a European Redemption Fund. In exchange, each country would transfer a yearly flow of resources to the Fund. We show that it is possible to design such a scheme so that it does not entail any ex-ante cross-country redistribution, while the euro area as a whole would benefit as the lowering of member states’ annual refinancing needs would improve financial stability. The fraction of mutualized debt would be fully redeemed over a reasonable number of years. The scheme would not jeopardize national commitment to debt reduction; if anything, market discipline would become more effective at the margin.

Keywords: euro area, sovereign debt, debt redemption fund, financial stability

JEL Classification: E6, H12, H60

Suggested Citation

Cioffi, Marika and Rizza, Pietro and Romanelli, Marzia and Tommasino, Pietro, Outline of a Redistribution-Free Debt Redemption Fund for the Euro Area (February 4, 2019). Bank of Italy Occasional Paper No. 479, February 2019. Available at SSRN: https://ssrn.com/abstract=3432516 or http://dx.doi.org/10.2139/ssrn.3432516

Marika Cioffi

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Pietro Rizza

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Marzia Romanelli

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Pietro Tommasino (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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