Global financial policy makers are studying GDP-indexed bonds as a possible financing tool to reduce the likelihood of governments defaulting on their debt following an economic shock. Proponents argue in favour of the large-scale issuance of such loss-absorbing liabilities to stabilize debt/GDP ratios, while skeptics suggest that such debt would be very expensive to issue — especially as there is no proven market for the securities. A test issuance of GDP-indexed bonds is needed to determine whether they would be an attractive addition to sovereign debt portfolios; policy makers may want to increase attention to the budget-stabilizing benefits of GDP-indexed bonds as well as ancillary benefits. Further technical work is required to support a test issuance of the bonds.
CIGI Senior Fellow Gregory Makoff is researches issues in international financial policy, including the management of sovereign debt crises. He is an expert in sovereign debt and an experienced debt capital markets professional.