Feeling the blues Moral hazard and debt dilution in Eurobonds before 1914

• We identify the closest historical precedents of the proposals for debt mutualisation in Europe.
• We use a historical dataset to reach policy-relevant conclusions.
• We find that contemporary concerns about fiscal transfers and debt dilution may be overstated.
• We show that creditors' moral hazard may be as much of a problem as debtors'.

Debt mutualisation through Eurobonds has been proposed as a solution to the Euro crisis. Although this proposal found some support, it also attracted strong criticisms as it risks raising the spreads for strong countries, diluting legacy debt and promoting moral hazard by weak countries. Because Eurobonds are a new addition to the policy toolkit, there are many untested hypotheses in the literature about the counterfactual behaviour of markets and sovereigns. This paper offers some tests of the issues by drawing from the closest historical parallel – five guaranteed bonds issued in Europe between 1833 and 1913. The empirical evidence suggests that contemporary concerns about fiscal transfers and debt dilution may be overblown, and creditors' moral hazard may be as much of a problem as debtors'.