European Capital Markets with a Single Currency

By Jean Dermine; Pierre Hillion | Go to book overview

required level of other taxation. The country can hedge against this possibility by accumulating euro-denominated net assets, partially financed by borrowing in currencies other than the euro.

A second motive to take on euro-denominated debt may be a desire to pay a low default premium, assuming that the total default premium bjdj + bj*dj* that a country pays on its debt is a decreasing function of the amount bj of euro-denominated debt, at least at low levels of bj. We have argued that this will be the case if the fixed cost of default on the euro-denominated debt is higher than the cost of default on debt denominated in other currencies and lower than the cost of defaulting on both.


References

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