A Mechanism to Regulate Sovereign Debt Restructuring in the Euro Area

27 Pages Posted: 30 Sep 2016

See all articles by Jochen R. Andritzky

Jochen R. Andritzky

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

Désirée I. Christofzik

German Council of Economic Experts

Lars P. Feld

Walter Eucken Institute; University of Freiburg - College of Economics and Behavioral Sciences; CESifo (Center for Economic Studies and Ifo Institute)

Uwe Scheuering

German Council of Economic Experts

Multiple version iconThere are 2 versions of this paper

Date Written: August 16, 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: sovereign debt restructuring mechanism, no-bailout clause, creditor participation clauses, ESM

JEL Classification: E620, F360, H630

Suggested Citation

Andritzky, Jochen and Christofzik, Désirée I. and Feld, Lars P. and Scheuering, Uwe, A Mechanism to Regulate Sovereign Debt Restructuring in the Euro Area (August 16, 2016). CESifo Working Paper Series No. 6038, Available at SSRN: https://ssrn.com/abstract=2845278

Jochen Andritzky

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

Désirée I. Christofzik

German Council of Economic Experts ( email )

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

Lars P. Feld (Contact Author)

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-W├╝rttemberg D-79100
Germany

University of Freiburg - College of Economics and Behavioral Sciences ( email )

Freiburg, D-79085
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Uwe Scheuering

German Council of Economic Experts ( email )

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

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