Buying Time: The Legal Case for Italy to Extend Maturities and Its Effective Advantages and Disadvantages

Abstract

This paper argues that Italy possesses the right to unilaterally extend maturities on its outstanding local law bonds under an explicitly established provision of Italian law, putting it in a strong negotiating position with its creditors for a potential restructuring. It also examines the unique ways in which Italy is insulated from legal risk in the event creditors take action, particularly due to a lack of acceleration clauses in some (and possibly all) debt instruments.

Unilateral maturity extension would provide several benefits to Italy: first, maturity extensions, as opposed to principal haircuts, would mitigate the harm endured by Italy’s banking sector, which was a primary concern of the Edelen proposal and has grown even more important as Italy’s banking sector has only increased its exposure to Italian debt in recent years; second, Italy’s short-term debt obligations would be reduced, allowing the Italian government greater maneuverability in attempting to restart growth and adopt more reasonable fiscal policies; third, this proposal accomplishes the main objectives of a recovery while reducing legal risk, as it works within explicitly contemplated frameworks, without any ex post alterations or overly coercive and discriminatory measures.

Part I of this proposal discusses the background Italian situation with an eye on the law permitting a unilateral extension of maturities on some (if not all) of the local law issued debt instruments. Part II outlines how this maturity extension would affect both Pre-2013 and Post-2013 issued debt instruments based on the presence or absence of the ESM instituted Euro CACs. Part III discusses the synergy between maturity extension, and the remedies available to a potential litigious creditor as a result, particularly with respect to acceleration.

Keywords: sovereign debt, Italy, collective action clauses, CACs

JEL Classification: F, G, K