Sovereign Debt Restructuring in Europe
| Date | 01 June 2018 |
| DOI | http://doi.org/10.1111/1758-5899.12531 |
| Author | Lee C. Buchheit,G. Mitu Gulati |
| Published date | 01 June 2018 |
Sovereign Debt Restructuring in Europe
Lee C. Buchheit and G. Mitu Gulati
Duke University Law School
Abstract
The Eurozone sovereign debt crisis began in the spring of 2010. Seven years on seems like an appropriate point at which to
critique how the crisis has been handled and to assess whether policy changes will be required should it flare up again. In
particular, there are a number of lessons to be learned from the Greek debt restructuring of 2012.
Policy Implications
•Investors in Euro-area sovereign bonds need to be disabused of the belief that taxpayers will bail them out at par in the
event of another crisis; the result they have come to expect after the last crisis. To the extent that they continue to nur-
ture that belief, they will neither analyze nor price their sovereign lending correctly.
•Strengthening collective action clauses –the solution proposed by some commentators –will be pointless unless backed
by a willingness to use the clauses in a crisis to facilitate a debt workout.
•The ESM can be amended in ways that will discourage creditors from declining to participate in future ESM-backed sover-
eign debt workouts.
A debt restructuring ... would be like the death
penalty –which we have abolished in the Euro-
pean Union. (Atkins, 2017, quoting Lorenzo Bini
Smaghi).
The Eurozone sovereign debt crisis began in the spring of
2010. Seven years on seems like an appropriate point at
which to critique how the crisis has been handled and to
assess whether policy changes will be required should it
flare up again. In particular, there are a number of lessons
to be learned from the Greek debt restructuring of 2012.
The policy to date
With the sole exception of the belated Greek debt restruc-
turing of 2012, the policy adopted to address the sovereign
debt problems of Eurozone countries since 2010 has had
these elements:
•The most seriously afflicted countries (Greece, until 2012,
Ireland, Portugal and Cyprus) were lent all the money
they needed to repay in full and on time their maturing
bond indebtedness. The lenders were the European
Union (and its lending vehicles) and the International
Monetary Fund.
•As a result, a substantial portion of the liabilities repre-
sented by the bond indebtedness of these countries
migrated onto the shoulders of official sector lenders.
1
•With very little publicity, those official sector lenders
(apart from the IMF) have already extended the maturity
of their credits and substantially reduced the interest rate
on those loans (Corsetti et al., 2017).
•Depending on the outcome of the pending Greek negoti-
ations, a further restructuring of official sector loans may
be required for that country (Zettelmeyer et al., 2017).
•In an effort to preserve market access for Eurozone sover-
eign borrowers, the ECB has announced (but has not yet
implemented) a program dubbed Outright Monetary
Transactions (OMT).
2
OMT involves a promise by the ECB
to buy the bonds of distressed Eurozone countries in the
secondary market ‘in unlimited quantities’if necessary to
ensure continued market access by the debtor country.
Unique and exceptional
The combined effect of these measures has been to limit
the need for a restructuring of the commercial debt of Euro-
zone countries to the single instance of Greece’s 2012 debt
restructuring. European officialdom, from the outset, has
attempted to calm market anxiety by repeatedly assuring
investors that the actions taken in connection with the
Greek debt were never-to-be-repeated, ‘unique and excep-
tional’events (e.g. Wyplosz, 2014).
At least at the level of the ECB, there has been no public
retrenchment from the proposition that there will never be
another restructuring of the debt of a Eurozone sovereign.
On 11 May 2017, the Financial Times reported:
Asked what would happen if a Eurozone member
needed to restructure its debt, he [Mario Draghi,
President of the ECB] said: ‘We don’t want to spec-
ulate on the probability of things that have no
chance of happening. Why are you asking me that?
(Jones and Khan, 2017).
Global Policy (2018) 9:Suppl.1 doi: 10.1111/1758-5899.12531 ©2018 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 9 . Supplement 1 . June 2018 65
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