GDP-linked bonds Default risk Optimized indexed debt approach Welfare decomposition

The default risk of Belgium government on its debt is currently low but concerns arise as Fitch downgrades Belgium’s credit rating from stable to negative.
The concept of linking debt payments to changes in GDP became popular again during the debt crisis of the 1980s and gained even more attention during the COVID-19 pandemic. The utilized research suggests that the benefits of this idea depend on how it is implemented and are greatest when payments are directly linked to changes in GDP.
Past experience with GDP-linked bonds, particularly the failure of Argentina's experiment and the success of Portugal's engineering with these financial assets, suggests that the design of the contract is key.
By using an optimized indexed debt approach, default risk can be eliminated, consumption volatility might be halved, and asset prices can rise although government debt balances increase. These changes occur because a carefully chosen indexation method can improve market completion.



Yasin Kürşat Önder

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