Andrea Consiglio, Stavros Zenios, 02 January 2016

Contingent debt has been gaining ground as a tool for banking stability. This column argues for the advantages of sovereign debt with a contingent payment standstill. Sovereign contingent debt would have instigated early responses for Eurozone crisis countries ranging from a couple of months (Ireland) to almost two years (Cyprus). Pricing simulations illustrate how this financial innovation creates appropriate incentives for sovereigns and addresses creditor moral hazard. Using contingent debt for Greece, we illustrate that the country’s debt profile can improve significantly.

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