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The design of a sovereign debt restructuring mechanism for the euro area: Choices and trade-offs

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  • Christophe Destais
  • Frederik Eidam
  • Friedrich Heinemann

Abstract

This paper critically assesses several dimensions of a sovereign debt restructuring mechanism (SDRM) for the euro area. The novelty of our analysis is that we abstain from recommending one ideal model for a restructuring mechanism. Instead, we apply a menu-type approach. For five key institutional SDRM dimensions, we discuss the underlying fundamental trade-offs and discuss the pros and cons of different design choices. Specifically, we investigate the following SDRM dimensions: (i) the institutional assignments of responsibilities, (ii) the condition or decision rule that triggers a debt restructuring, (iii) the design and size of debt restructuring, (iv) the role and details of collective action clauses (CACs), and (v) the safeguards for financial stability in support for a SDRM. We conclude that there is no such thing as the single optimal SDRM. Design decisions require judgements on the underlying trade-offs and related assumptions on relative costs. Also, the search for an appropriate euro area SDRM design can benefit from complementarities. Ambition in one dimension can offer more degrees of freedom in another dimension. Our analysis implies that there is no convincing reason to further taboo the search for a euro area SDRM, as there are ways to combine the opportunities of a credible SDRM with financial stability.

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  • Christophe Destais & Frederik Eidam & Friedrich Heinemann, 2019. "The design of a sovereign debt restructuring mechanism for the euro area: Choices and trade-offs," CEPII Policy Brief 2019-25, CEPII research center.
  • Handle: RePEc:cii:cepipb:2019-25
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    Cited by:

    1. Ludger Schuknecht, 2019. "Fiscal-Financial Vulnerabilities," CESifo Working Paper Series 7776, CESifo.
    2. Sebastian Blesse & Annika Havlik & Friedrich Heinemann, 2021. "Euro area reform preferences of Central and Eastern European economic experts," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(1), pages 155-179, February.
    3. Maxime TERRIEUX & Benoît Jonveaux & Marin Ferry (Université Gustave Eiffel, DIAL), 2021. "Debt sustainability in Africa: state of play and future challenges," Working Paper 5b1b8e30-4a94-42f3-9e4b-9, Agence française de développement.
    4. Maxime TERRIEUX & Benoît Jonveaux & Marin Ferry (Université Gustave Eiffel, DIAL), 2021. "La soutenabilité des dettes en Afrique : état des lieux et enjeux futurs," Working Paper 5b1b8e30-4a94-42f3-9e4b-9, Agence française de développement.

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    More about this item

    Keywords

    Eurozone Crisis; Sovereign Debt Restructuring Mechanism; Collective Action Clauses;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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