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Making the Case for Sovereign GDP-Linked Bonds

The crises that erupted in countries like Ireland and Greece a decade ago would not have been so severe had their debt been linked to their economic performance. And the same is true today: Investors around the world will continue to accept the risk, given the unlimited upside to investing in entire economies.

LONDON – The time has come for national governments around the world to start issuing their debt in a new form, linked to their countries’ resources. GDP-linked bonds, with coupons and principal that rise and fall in proportion to the issuing country’s GDP, promise to solve many fundamental problems that governments face when their countries’ economies falter. And, once GDP-linked bonds are issued by a variety of countries, investors will be attracted by the prospect of high returns when some of these countries do very well.

This new debt instrument is especially exciting because of its monumental size. Although issues may start out small, they will be very important from the outset. The capitalized value of total global GDP is worth far more than the world’s stock markets, and could be valued today in the quadrillions of US dollars.

Now an authoritative open-source online handbook just published by the Centre for Economic Policy Research, Sovereign GDP-Linked Bonds: Rationale and Design, explains how governments can do this. I co-edited the book with Jonathan D. Ostry of the International Monetary Fund, and James Benford and Mark Joy of the Bank of England. The book draws on work commissioned by the recent Chinese and German presidencies of the G20, with the collaboration of 20 leading economists, lawyers, and investors. Its publication carries endorsements from Andy Haldane, Executive Director of Financial Stability of the Bank of England, and Maurice Obstfeld, Economic Counselor and Research Director at the International Monetary Fund.