A Mechanism to Regulate Sovereign Debt Restructuring in the EURO Area

27 Pages Posted: 4 Aug 2016

See all articles by Jochen R. Andritzky

Jochen R. Andritzky

German Council of Economic Experts; International Monetary Fund (IMF)

Lars P. Feld

Walter Eucken Institute

Désirée I. Christofzik

German Council of Economic Experts

Uwe Scheuering

German Council of Economic Experts

Multiple version iconThere are 2 versions of this paper

Date Written: July 2016

Abstract

To make the no-bailout clause credible and enhance the effectiveness of crisis assistance, a consistent institutional and legal framework is needed to ensure that private creditors contribute to crisis resolution. Getting activated as part of ESM crisis assistance, we propose a two-stage mechanism that allows to postpone the fateful distinction between liquidity and solvency crises: At the onset of a ESM programme, the framework demands an immediate maturity extension if the debt burden is high, followed by deeper debt restructuring if post-crises debt proves unsustainable. The mechanism is easily implemented by amending ESM guidelines and compelling countries to issue debt with Creditor Participation Clauses (CPCs). As debt is rolled over, the mechanism gradually phases in, leaving countries time to reduce debt. Given that private sector involvement reduces financing needs, the ESM could provide longer programmes and more time for reforms.

Keywords: public debt, sovereign debt restructuring, euro area

JEL Classification: F34, G15

Suggested Citation

Andritzky, Jochen and Feld, Lars P. and Christofzik, Désirée I. and Scheuering, Uwe, A Mechanism to Regulate Sovereign Debt Restructuring in the EURO Area (July 2016). Available at SSRN: https://ssrn.com/abstract=2817367 or http://dx.doi.org/10.2139/ssrn.2817367

Jochen Andritzky (Contact Author)

German Council of Economic Experts ( email )

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hessen 65180
Germany

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Lars P. Feld

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-Württemberg D-79100
Germany

Désirée I. Christofzik

German Council of Economic Experts ( email )

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hesse 65180
Germany

Uwe Scheuering

German Council of Economic Experts ( email )

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hessen 65180
Germany

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