Structured Eurobonds: Limiting Liability and Distributing Profits

18 Pages Posted: 14 Feb 2014

See all articles by Alexandra Hild

Alexandra Hild

University of Bayreuth

Bernhard Herz

University of Bayreuth

Christian Bauer

University of Trier; Universität Trier

Date Written: March 2014

Abstract

In this article, an alternative eurobond approach is developed by applying an asset‐backed security (ABS) transaction to a pool of eurozone sovereign bonds. Based on the new approach two different rules to distribute the associated interest gains are analyzed. Within the ABS structure a special purpose vehicle buys a portfolio of eurozone sovereign bonds (pooling) and issues a set of subordinated eurobonds with varying risk and rating (tranching). A large share of less risky securities is created as structuring concentrates the default risk in one part of the capital structure. A trust fund covers first losses in case of a country default. This approach has three major advantages. First, all eurozone countries can gain from eurobonds. These benefits are driven by partial liability, which also limits moral hazard, and the distribution of interest gains to all participating countries. Second, the approach is very flexible and quickly implementable. Finally, it is in line with European Union law.

Suggested Citation

Hild, Alexandra and Herz, Bernhard and Bauer, Christian, Structured Eurobonds: Limiting Liability and Distributing Profits (March 2014). JCMS: Journal of Common Market Studies, Vol. 52, Issue 2, pp. 250-267, 2014, Available at SSRN: https://ssrn.com/abstract=2395570 or http://dx.doi.org/10.1111/jcms.12104

Alexandra Hild (Contact Author)

University of Bayreuth ( email )

Bernhard Herz

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Christian Bauer

University of Trier ( email )

15, Universitaetsring
Trier, 54286
Germany

Universität Trier ( email )

Germany

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