Government Debt Denomination Policies Before and After the EMU Advent

Abstract

Through a cost-minimizing approach, this paper derives four joint indicators to assess the ef…ciency of the mix of sovereign debt currencies between the countries belonging to the European Monetary Union (EMU). This theoretical insight enables us to explain why and how the introduction of the euro and the adoption of a common monetary policy may have led to signi…cant changes in debt structure among EMU members, notably in favor of further euro-denominated debt. The interplay of intrinsic and strategic variables yields stylized facts that are consistent with country-speci…c empirical evidence. Following the sovereign debt crisis, we further emphasize the value-added of a coordinated debt issuance policy among EMU countries.

The Added Value of a Central Agency of European Debt

“…These countries tend to behave as if they were systematically refinancing their maturing foreign debt (outstanding before the EMU advent) by debt denominated in euro. This finding confirms the prediction of Hübner and Joliet (2011), and leads to corner solutions at all domestic debt for all member countries.…”

“…Pooling bond issuance within a consortium and endowing a separate body with the right and responsibility of issuing bonds on behalf of the consortium can be related to a cost-benefit analysis performed by Hübner and Joliet (2011).…”

“…This holds from the facts that (i) the CAED chooses the optimal mix of domestic and foreign debt on the basis of the dynamics of the respective spreads (see Hübner and Joliet, 2011), and (ii) the collective guarantee warranted by the consortium members improves their overall credit quality by a default risk diversification argument. In the present case, the yield to maturity that would make each country neutral with respect to the issuance of new debt by the CAED and with own debt issuance in isolation is 2.48%.…”

International Investment Patterns: the Case of German Sectors

“…The table offers more evidence in favour of an inverse relation between holdings and distance although the corresponding German general government holdings still remain insensitive to the variable. Opposing the arguments of Hübner and Joliet (2013) for example, our results for distance do not suggest that EMU biases the debt portfolio of the sovereign towards euro-denominated positions. As shown, German bank holdings tend to exhibit the largest sensitivity to distance.…”