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Government Debt Denomination Policies Before and After the EMU Advent

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Abstract

Through a cost-minimizing approach, this paper derives joint indicators to assess the efficiency 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 significant 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-specific empirical evidence. Following the sovereign debt crisis, we further emphasize the value-added of a coordinated debt issuance policy among EMU countries.

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Notes

  1. Luxembourg and Greece do not report sufficient data and are therefore omitted.

  2. All processes are expressed under the risk-adjusted probability measure, which is assumed to exist for each type of risk.

  3. We prefer this specification to an Ornstein–Uhlenbeck process because the evolution of the debt ratio is an essential tool of budgetary policies, and so one should observe a firm drift in this ratio corresponding to a particular political orientation.

  4. The choice of an Ornstein–Uhlenbeck or a square-root process, which both feature a mean-reverting behavior, might better reflect policy changes in the long run, but the gain in the spread specification would not be significant while it would add useless complexity in the model. The requirement that spreads are linear is not too stringent, because it is not a strict pricing exercise. We explicitly ruled out the Geometric Brownian Motion specification because it involves a lognormal behavior of the spreads and rules out negative values of the spreads. Such a requirement should not hold at all in the paper.

  5. The case of the Greek sovereign debt, whose the eurozone rescue plan, designed in October 2011, involved a write-off of part of the debt but no outright default, illustrates the relevance of this assumption.

  6. The joint determination of optimal debt mix and maturities produces similar results. To save space, it is left out of the paper. Detailed results are available upon request.

  7. Yearly data and estimates are available upon request.

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Acknowledgements

We thank George S. Tavlas (the Editor) and two anonymous referees for their valuable comments and suggestions, as well as Jan Annaert, Marc de Ceuster and Lars Nielsen for their comments on earlier versions of this paper. Georges Hübner acknowledges financial support from Deloitte Belgium and Deloitte Luxembourg. Any remaining errors are ours.

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Authors and Affiliations

  1. Center for Asset and Risk Management, HEC-University of Liège, Rue Louvrex, 14-Bât N1, 4000, Liège, Belgium

    Georges Hübner

  2. Faculty of Economics and Business Administration, Maastricht University, P.O. Box 616, 6200 MD, Maastricht, The Netherlands

    Georges Hübner

  3. Gambit Financial Solutions, Rue Defacqz 78, 1050, Bruxelles, Belgium

    Georges Hübner

  4. IESEG School of Management (LEM, UMR CNRS 8179), Rue de la Digue 3, 59000, Lille, France

    Robert Joliet

  5. IESEG School of Management (LEM, UMR CNRS 8179), Parvis de la Défense 1, 92044, Paris (La Défense), France

    Robert Joliet

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  1. Georges Hübner
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Correspondence to Robert Joliet.

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Hübner, G., Joliet, R. Government Debt Denomination Policies Before and After the EMU Advent. Open Econ Rev 24, 283–309 (2013). https://doi.org/10.1007/s11079-011-9238-9

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