Fiscal Limits and the Pricing of Eurobonds

Wed, 11/17/2021 - 12:00 / 13:00

405, Viale Romania

Speaker: Jean-Paul Renne , HEC Lausanne

Authors: Kevin Pallara, Jean-Paul Renne

Abstract

This paper proposes a methodology to price bonds jointly issued by a group of countries—Eurobonds in the euro-area context. We consider two types of bonds: the first is backed by several and joint (SJG) guarantees, the second features several but not joint (SNJG) guarantees. The pricing of SJG and SNJG bonds reflects different assumptions regarding the pooling of debtors’ fiscal resources. We estimate fiscal limits for the four largest euro-area economies over 2008-2020 and deduce counterfactual Eurobond prices. Amid the euro-debt crisis, 5-year SNJG bond yield spreads would have been about twice larger than SJG ones. Hence, issuing SJG bonds would result in gains at the aggregate level. We finally show that (i) the gains stemming from the issuance of SJG bonds could be shared among countries through post-issuance redistribution schemes and that (ii) these schemes may alleviate the reduction in market discipline resulting from common bonds issuance.

Further details about the paper at following link: Fiscal Limits and the Pricing of Eurobonds by Kevin Pallara, Jean-Paul Renne :: SSRN