Feeling the blues Moral hazard and debt dilution in Eurobonds before 1914 |
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| Institution: | 1. Department of Economics, University of Oxford, Manor Road, Oxford OX13UQ, UK;2. Department of History, University College London, Gower Street, London WC1E6BT, UK;1. Center for Healthcare Operations Improvement and Research (CHOIR), University of Twente, Enschede, Netherlands;2. Department of Quality and Process Innovation, Academic Medical Center, Amsterdam, Netherlands;3. Stochastic Operations Research, Department of Applied Mathematics, University of Twente, Netherlands;4. Industrial Engineering and Business Information Systems, School of Management and Governance, University of Twente, Netherlands;5. Department of Radiology, Academic Medical Center, Netherlands;1. School of Management, State University of New York at Binghamton, 4400 Vestal Pkwy E, Binghamton, NY 13902, United States;2. Nanyang Business School, Nanyang Technological University, 50 Nanyang Avenue, Singapore 639798, Singapore;3. School of Business, Rutgers University-Camden, 227 Penn Street, Camden, NJ 08102, United States |
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| Abstract: | Debt mutualisation through Eurobonds has been proposed as a solution to the Euro crisis. Although this proposal found some support, it also attracted strong criticisms as it risks raising the spreads for strong countries, diluting legacy debt and promoting moral hazard by weak countries. Because Eurobonds are a new addition to the policy toolkit, there are many untested hypotheses in the literature about the counterfactual behaviour of markets and sovereigns. This paper offers some tests of the issues by drawing from the closest historical parallel – five guaranteed bonds issued in Europe between 1833 and 1913. The empirical evidence suggests that contemporary concerns about fiscal transfers and debt dilution may be overblown, and creditors' moral hazard may be as much of a problem as debtors'. |
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