1. What exactly is a GDP-linked bond?
When governments issue bonds to raise money, they pay investors a coupon typically in the form of interest at a fixed rate or tied to the inflation rate. But there’s another way: linking the coupon to economic growth. If a country’s economy grows strongly, it pays more in interest, and if it does badly, it pays less. Italy is aiming one such bond — called “BTP Futura” — at mom and pop investors to help finance its response to the coronavirus crisis. Interest rates will increase with time to reward savers. For those who hold the bonds to maturity, there’s a so-called “fidelity premium” tied to the nominal growth rate over the 10-year life of the bond.
2. What’s the advantage?
For countries experiencing economic pain, payments to bondholders would probably be lower than with conventional securities. Take Italy as an example. The economic shock resulting from…