Compliance Effects of Sovereign Debt Cuts

22 Pages Posted: 6 Nov 2019

See all articles by Eckhard Janeba

Eckhard Janeba

University of Mannheim - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Armin Steinbach

Max Planck Law Network - Max Planck Institute for Research on Collective Goods; Oxford University - Nuffield College; German Federal Ministry of Finance

Date Written: July 5, 2019

Abstract

The controversy about sovereign debt cuts loomed prominently throughout crisis in the European Union (EU), as the EU legal rules were viewed to impose strict limitations on debt restructuring involving public creditors due to moral hazard concerns enshrined in the legal ban on bailouts. This analysis explores the economic plausibility of the legal regime, with the applicable legal standard capturing the impact of debt restructuring on the debtor's expected compliance with fiscal rules. Our theory shows that the effect of debt cuts on fiscal compliance depends on two effects, the direction of which determines the overall effect on expected fiscal compliance. We empirically review the plausibility of our theoretical results by exploiting survey data from members of state parliaments in Germany. Data limitations notwithstanding, our results offer some plausibility that haircuts can make fiscal compliance more attractive and likely. The results call for re-visiting the legal framework applicable to debt cuts EU rules.

Keywords: debt restructering, fiscal rules, compliance, German debt brake

JEL Classification: H000

Suggested Citation

Janeba, Eckhard and Steinbach, Armin, Compliance Effects of Sovereign Debt Cuts (July 5, 2019). CESifo Working Paper No. 7677, Available at SSRN: https://ssrn.com/abstract=3422260

Eckhard Janeba (Contact Author)

University of Mannheim - Department of Economics ( email )

L7, 3-5
D-68131 Mannheim
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Armin Steinbach

Max Planck Law Network - Max Planck Institute for Research on Collective Goods ( email )

Kurt Schumacher Str 10
Bonn, 53113
Germany

Oxford University - Nuffield College ( email )

New Road
Oxford, OX1 1NF
United Kingdom

German Federal Ministry of Finance ( email )

Wilhelmstrasse 13
Berlin, 11019
Germany

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