In some cases, however, these securities may not have any principal claim and the notional is only used as a basis for calculating the investor's share of payments.
The existence of this type of debt can reduce the probability of default because they tend to keep the debt/GDP ratios within a narrower range than fixed income bonds.
[3] GDP-linked bonds also act as automatic stabilizers and reduce the temptation for policymakers to spend too much in periods of high growth.
In this sense this type of bond may be especially useful for developing countries where the presence of weaker institutions makes it easier for governments to implement more volatile policies.
Finally, even if this type of bond were initially thought in the context of emerging markets, they also constitute an interesting idea for developed countries.
Crises are generally accompanied by large exchange rate depreciations that are driven by the fall in domestic consumption.
Being one of the initiators in this type of market implies taking risks and undergoing a learning process that many agents are not incentivized to do.
For example, an initiative from multilateral institutions could play the role of first mover and coordinate issuances of GDP-linked bonds from different countries.
Mexico[11] issued several bonds indexed to oil prices during the 1970s and later on, in the early 1990s, Mexico, Nigeria, Uruguay and Venezuela issued some Brady bonds with Value Recovery Rights (VRR), that were structured to pay higher returns when the price of certain commodities was sufficiently high.
The first pure GDP-linked bonds were issued by Costa Rica, Bulgaria and Bosnia Herzegovina,[12] also in the context of the Brady restructuring agreements, in the 1990s.
Greece and Argentina issued warrant-like instruments with some similarities to GDP-linked bonds as part of their recent restructurings in 2012 and 2005 respectively.
Under the terms of the Greek security, investors can receive only up to 1% of their notional in a given year provided that a number of conditions are met.
Conversely, if there is an unusually better economic performance and the country grows 5% instead of 3%, then the GDP-linked bond will pay a coupon of 9%.