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The Blue Bond Proposal Jacques Delpla and Jakob von Weizsäcker 16 March 2011

The Blue Bond Proposal Jacques Delpla and Jakob von Weizsäcker 16 March 2011. Interest rate. cost of borrowing (status quo). Debt level. Interest rate. risk of orderly default. illiquidity. junior status. senior status. liquidity. joint and several liability. Debt level.

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The Blue Bond Proposal Jacques Delpla and Jakob von Weizsäcker 16 March 2011

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  1. The Blue Bond Proposal Jacques Delpla and Jakob von Weizsäcker 16 March 2011

  2. Interest rate cost of borrowing (status quo) Debt level

  3. Interest rate risk of orderly default illiquidity junior status senior status liquidity joint and several liability Debt level

  4. What to gain for all Euro Area: International liquidity World Hunger from emerging mkts, insurers, central banks… of assets: Ultra safe and Ultra liquid Now, only the US provides that (with US Treasury bonds)  ‘exorbitant financial privilege’ of the US Blue bonds are competitors to the US exorbitant privilege Blue bonds: an opportunity for Europe as the US safe asset status is jeopardize by large US deficits, lack of fiscal consensus, risks of inflation Gains of international liquidity for Blue bonds : 30bps per year using swaps spreads differentials Up to 80 bps per year (Warnock and Warnock)

  5. Interest rate + reduced bailout costs for anchor countries fiscaldiscipl. fiscaldiscipline Debt level

  6. Governance Framework for the Blue Bond Annually: Blue Bond allocation proposed by an independent stability council To be adopted by all national parliaments (national budgetary authority) on a take it or leave it basis (Fully symmetrical decision making but de facto veto powers for large anchor countries)

  7. Blue Bonds and the crisis • Harnessing the power of markets in support of reformed SGP • Strong signal that integrity of euroa area will be preserved • Credible basis for „orderly bankruptcy“(keeping red bonds out of the banking system) • Complementary to crisis mechanism (small ESM!)

  8. Aufteilung des Schuldenstands 2011 ohne Restrukturierung Debt levels in 2011

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