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GDP indexed bonds: An idea whose time has come

GDP indexed bonds: An idea whose time has come. Stephany Griffith-Jones 7 th June, 2006. Benefits of GDP-linked bonds for borrowing countries. Stabilize Government spending and limit pro-cyclicality in good and bad times Reduce likelihood of defaults and debt crises

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GDP indexed bonds: An idea whose time has come

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  1. GDP indexed bonds: An idea whose time has come Stephany Griffith-Jones 7th June, 2006

  2. Benefits of GDP-linked bonds for borrowing countries • Stabilize Government spending and limit pro-cyclicality in good and bad times • Reduce likelihood of defaults and debt crises • Could benefit both emerging and developed economies

  3. Benefits of GDP-linked bonds for investors • Opportunity to take position on countries’ growth rates. Provide valuable diversification opportunity • Lower frequency of defaults and crises, which can be costly and result in large losses

  4. Benefits of GDP-linked bonds for the global financial system • Externalities: For other investors For other issuers For multilaterals • Justifies public action to help initially develop this instrument • Possible roles for IFI’s

  5. Ways forward on addressing concerns: • Investors • Sufficient liquidity and scale • Potential problems of GDP measurement being overstated • Initial issues of pricing • Issuers • Perceived benefits to exceed additional cost

  6. An idea whose time has come • Large investor appetite for EM risk and abundant liquidity in financial markets • Financial markets innovative in creating instruments that offer antecedents for GDP-linked bonds • Favourable experience with Argentine warrants

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