Performance-Sensitive Government Bonds

Steadily growing debt ratios indicate that current sovereign debt policy lacks important incentives for governments and politicians to fulfill it in a long-term sustainable way. To implement proper incentives, we propose the concept of performance- sensitive government bonds (PSGB) where coupon payments are closely linked to debt policy, giving strong incentives to limit debt levels and to timely restructure the economy. In addition, we show that the current mechanisms used to solve sovereign debt problems within the EMU are not only missing the right incentives but also setting the wrong ones.