GDP-Linked Bond

GDP-linked bond is a debt security, the payments on which are linked to the dynamics of GDP. These securities have recently attracted some attention, also within the G20, when discussing possible ways to improve the stability of the international financial system.

Countries generally issue bonds with fixed coupon payments. However, it is possible to issue coupon bonds linked to the government solvency. GDP-linked bonds, for which payments are linked to the GDP dynamics of the issuing country, are an example of such an instrument. GDP-linked bonds can be structured in many ways. For example, the payment of nominal value and/or coupon payments may be linked to GDP, or the measure of GDP considered can be real or nominal.

GDP-linked bonds could introduce moral hazard, because governments may have some incentive to stimulate GDP growth in an effort to reduce their borrowing costs. However, these hazards could be mitigated by strengthening the independence of national statistical agencies or by involving international organizations in data verification.

Currently, GDP-linked instruments are most often issued by governments as a part of the country’s debt restructuring. For example, GDP-linked securities were issued by Argentina in 2005, by Greece in 2012 and by Ukraine in 2015. Another noteworthy issue was BTP Futura, a similar debt instrument issued by Italy in 2020.