ΑΠΟΚΛΕΙΣΤΙΚΗ ΕΝΗΜΕΡΩΣΗ, ΤΟ “ΜΠΛΕ” ΟΜΟΛΟΓΟ Κ ΑΙ ΤΟ “ΚΟΚΚΙΝΟ” ΧΡΕΟΣ

Από τον Πόρτα – ΠόρταTHE BASIC ECONOMICS OF THE BLUE BONDBlue Bonds : EU countries should pool up to 60 percent of GDP of their national debt under joint and several liability as senior sovereign debt, there-by reducing the borrowing cost for that part of the debt.Red debt : any national debt beyond a country’s Blue Bond allocation should be issued as national and junior debt with sound procedures for an orderly default, thus increasing the marginal cost of public borrowing and helping to enhance fiscal discipline.Independent StabilityCouncil (ISC): Blue Bond allocations to member statesare to be proposed by anISC and voted on bymember states parliaments in order to safe-guard fiscalresponsibility.A country’s total borrowing costs can be calculated as the product of the stock of outstanding debt times the average interest rate to be paid on that debt stock, as Figure 1 on the next page shows. We propose that this essentially homogenous government debtsshould be broken down into two tranches: a senior (‘blue’) tranche up to a certain debt threshold which is assumed to be 60 percent of GDP in the following; and a junior(‘red’)tranche for any additional debt above that threshold. In case of a partial default, the red tranche will be hit first and the blue tranche will only be affected by that part of the default (if any) that is not absorbed by the junior tranche.In other words, any government funds used to service and repay government debt will always first be used to satisfy the claims of the Blue Bond holders. As a result, the blue tranche willbecome less risky than the status quo debt, and the red tranche will be more risky, leading to a differentiation in interest rates. This rate differentiation is reinforced by liquidity effects. Under our proposal, all the countries participating in the Blue Bond would pool and merge their blue tranches, creating a government bond market similar in size, liquidity and quality to the US Treasury debtmarket. Due to this gain in liquidity, the cost of borrowing would be further reduced on the bluetranche. By contrast, the liquidity of the red tranche would be substantially less than the liquidity of homogeneous national bonds currently. This reduced liquidity should further increase borrowing costs on the red debt.There are additional risk considerations that should be borne in mind. For the blue debtwe propose joint and several liability to ensure that a triple A asset is created. From an investor’s perspective, joint and several liabilitywill reduce the risk of the asset further because default risks tend not to be perfectly correlated. Therefore, the blue debt cost of borrowing inthe average euro-area country should be lower still. By contrast, defaulting on the entire red tranche would be less disruptive, because in this eventuality, the borrowing capacity in the senior tranche would not be destroyed. From an investor’s perspective, the prospect of a less-disruptive default on the junior tranche increases