A Theory of Eurobonds

22 Pages Posted: 16 Sep 2011 Last revised: 18 Nov 2012

See all articles by Angelo S. Baglioni

Angelo S. Baglioni

Catholic University of the Sacred Heart of Milan

Umberto Cherubini

University of Bologna - Department of Economics

Date Written: September 16, 2011

Abstract

We provide a structural model of sovereign credit risk, where the risk premium paid by the government is linked to some key economic variables of a country: public debt and deficit, GDP growth. This model is then applied to measure the impact of splitting the public debt into a senior and a junior tranches and the effect of introducing Eurobonds: in the latter case, tranching is coupled with a cross-guarantee among eurozone countries and with a cash collateral. We show both in theory and in numerical estimates that eurobonds are able to lower the overall cost of servicing the public debt for some (high debt) countries in the euro area, without increasing the cost for the other ones. Moreover, they are likely to give governments an incentive to curb their deficits, due to the higher marginal cost of debt.

Keywords: Eurobond, sovereign debt, credit risk, interest rate

JEL Classification: H63, G12

Suggested Citation

Baglioni, Angelo and Cherubini, Umberto, A Theory of Eurobonds (September 16, 2011). Available at SSRN: https://ssrn.com/abstract=1928573 or http://dx.doi.org/10.2139/ssrn.1928573

Angelo Baglioni (Contact Author)

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, n.1
Milano, 20123
Italy
390272344024 (Phone)
390272342781 (Fax)

Umberto Cherubini

University of Bologna - Department of Economics ( email )

Strada Maggore, 45
Bologna, FI 40125
Italy
+ +39 051 2092615 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
896
Abstract Views
3,596
rank
33,681
PlumX Metrics