Sovereign debt

GDP-linked Bonds: A Primer

Gross government debt in advanced economies has surpassed 105% of GDP, up from less than 75% a decade ago. Some countries with especially large debts—including Greece (177%), Italy (133%) and Portugal (129%)—are viewed not only as a risk to the countries themselves, but to others as well. As a result, policymakers and economists have been looking for ways to make it easier to manage these heavier debt burdens.

One prominent suggestion is that countries should issue GDP-linked bonds that tie the size of debt payments to their economy's well-being. We find this idea attractive, and see the expanding discussion of the viability of GDP-linked bonds both warranted and useful (see here and here). However, the practical issues associated with GDP data revision remain a formidable obstacle to the broad issuance and acceptance of these instruments....

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ECB Paddles Both Ways in the Rubicon

On January 22, the ECB crossed the Rubicon twice – but in opposite directions. In an effort to combat deflation and years of anemic growth, the central bank announced a sustained program of large-scale asset purchases. At the same time, it capped the amount of risk-sharing in the Eurosystem. Other central banks have done the first, but not the second.  And, while outright balance sheet expansion helped ease euro area financial conditions somewhat, the limit on risk-sharing works in the other direction. Rowing toward both shores at the same time doesn’t move a boat far or fast...

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