A Silver Lining: An Italian Debt Restructuring in the Wake of COVID-19

Abstract

As the global economy has become more integrated and increasingly complex, the need for a system that administers government default has become more and more apparent. The body of "sovereign debt law" that has emerged to fill this need in the context of the Eurozone is an amalgamation of treaty obligations, domestic law constitutional principles, and tensions between state government and supranational government actors. Using a hypothetical Italian restructuring, this paper seeks to explore how these different bodies of law operate together to create a system that protects government function as opposed to guaranteeing creditor recovery. Further, this paper explores how an exogenous shock as the COVID-19 pandemic effects the analyses undertaken at various points in the sovereign debt legal framework.

This analysis reveals a silver lining: although Italy has suffered horrible losses as the result of the COVID-19 pandemic, the effects of the pandemic will help mitigate the legal challenges faced by Italy in the course of a local-law restructuring effort and thus smooth the path to a successful post-COVID recovery.

Keywords: COVID-19, Coronavirus, Eurozone, Collective Action Clause, Italy, Sovereign Debt, European Stability Mechanism

JEL Classification: H63, H74, K33