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Advisor(s)
Abstract(s)
GDP-linked bonds could play an important role in helping countries to avoid
solvency crises, defaults and sovereign debt restructurings. Indexing a country’s debt
payments to its economic performance could give governments some type of
insurance against periods of declining growth rates.
In this context, this thesis illustrates the potential advantages of the issuance of such
an instrument, namely by quantifying the above mentioned insurance effect. As such,
the interest savings for a group of countries most affected by the European sovereign
debt crisis should they have issued GDP-linked bonds in the beginning of the decade
are calculated. It is concluded that theses savings would have been considerable.
Furthermore, in order to understand the additional room for countercyclical fiscal
measures created by this product, the correlation between primary balance and GDP
growth is simulated for both scenarios: debt with indexation to GDP growth and
without it. It is then concluded that correlation between those two variables would be
significantly higher with indexation.
In the same vein, it is also simulated the issuance of this instrument in currency
unions, in particular in the euro area, applying the corresponding fiscal constraint to
the total deficit of 3% of GDP. Thus, the correlation between primary balance and
GDP growth shows that indexing debt to GDP growth has the potential to offset the
curbing effect of the mentioned constraint.
Moreover, through simple regressions and using the Capital Asset Pricing Model, it
is concluded that the portion of undiversified risk associated to the indexation to
GDP growth would be low.