Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/110889 
Year of Publication: 
2015
Series/Report no.: 
CESifo Working Paper No. 5389
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper argues that the Eurozone crisis stems from a risk management failure in the Eurosystem’s design, and that applying insurance theory is useful. We model risk neutral agents choosing portfolios of government bonds of n countries in a monetary union and other assets. We firstly analyse a country’s debt choice, assuming as a benchmark case that the no-bailout threat is credible, accounting for the effect on its equilibrium interest rate, and then establish an equally efficient mutual insurance fund covering accruing indemnities almost certainly. We also discuss necessary institutional arrangements and other proposals in the light of our results.
Subjects: 
European debt crisis
sovereign debt
bailout
monetary union
debt management
JEL: 
G11
G12
G22
H63
H77
Document Type: 
Working Paper
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