Optimal Sovereign Debt for an Overdebted Country

Abstract

In this study, the role of debt maturity is analysed in a framework that blends a number of key macro-economic factors with a process of estimating an optimal debt maturity maximising net present value. The purpose is to reduce the real value of government liabilities for a highly indebted country, as for example in the case of Greece, over a 35-year period. The conclusion that emerges is that management of debt maturity is an essential component of the equilibrium policy and, as such, it can play an important role both in implementing tax smoothing programmes and in reducing costs associated with debt financing.