A Sovereign Debt Restructuring Framework for the Euro Area

Abstract

This paper discusses the legal framework for sovereign debt restructuring in the Euro area – both de lege lata and de lege ferenda. Sovereign debt restructurings remain exceptional events that come with profound implications for financial stability and monetary policy transmission. However, they may be necessary as part of a financial assistance program to a euro area Member State, as was the case for Greece in 2012. This paper seeks to contribute to the ongoing discussion on how to enhance the functioning of the Economic and Monetary Union (EMU) by exploring the legal aspects of sovereign debt restructuring in the euro area. This includes an analysis on whether and how the procedures for sovereign debt restructuring in the euro area can be made more orderly, fair, and predictable by establishing a European Sovereign Debt Restructuring Framework (ESDRF). Drawing upon international standards for sovereign bond documentation, one may consider the inclusion of enhanced Collective Action Clauses (CACs) as well as certain technical amendment clauses. In addition, two options for a sovereign debt dispute resolution mechanism are discussed: (i) a separate chamber at the Court of Justice of the European Union (CJEU) and (ii) a sovereign debt arbitration mechanism. The paper makes no judgement on the economic or political feasibility and necessity for such changes, but seeks to shed some light on the legal aspects to be taken into account in the context of reforming the euro area’s framework for sovereign debt restructuring.

JEL Classification: F34, H63