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Debt Restructuring in the Euro Area: a Necessary but Manageable Evil?

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  • Zsolt Darvas

Abstract

There are two possible responses to the Greek debt crisis: 'Plan A', continued official lending, for as long as needed, with possible voluntary private sector involvement, and 'Plan B', coercive pre-emptive or post-default restructuring with significant face value reduction in privately-held debt. Both options have risks, but it is necessary to move to Plan B sooner or later. The impact on Greece could be mitigated by foreign bank ownership and proper liquidity support measures. The direct spillover impact on the rest of the euro area seems small. But there is the risk of contagion, which is a serious concern. There is a cautious case for delaying somewhat Plan B in order to prepare for it.

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File URL: http://web.uni-corvinus.hu/matkg/working_papers/wp_2011_4_darvas.pdf
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Bibliographic Info

Paper provided by Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest in its series Working Papers with number 1104.

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Length: 39 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:mkg:wpaper:1104

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Keywords: debt restructuring; euro-area crisis; fiscal sustainability; financial interdependence; Lehman Brothers;

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  1. Zsolt Darvas & Christophe Gouardo & Jean Pisani-Ferry & André Sapir, 2011. "A comprehensive approach to the euro-area crisis: Background calculations," Working Papers 499, Bruegel.
  2. Gelos, R. Gaston & Sahay, Ratna & Sandleris, Guido, 2011. "Sovereign borrowing by developing countries: What determines market access?," Journal of International Economics, Elsevier, vol. 83(2), pages 243-254, March.
  3. Barry Eichengreen, 2007. "The Breakup of the Euro Area," NBER Working Papers 13393, National Bureau of Economic Research, Inc.
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Cited by:
  1. Guntram B. Wolff, 2011. "Changing of the guard - Challenges ahead for the new ECB president," Policy Contributions 600, Bruegel.
  2. Sylvia Gloggnitzer & Isabella Lindner, 2011. "Economic Governance Reform and Financial Stabilization in the EU and in the Eurosystem – Treaty-Based and Intergovernmental Decisions," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 36–58.
  3. Zsolt Darvas, 2012. "The euro crisis: ten roots, but fewer solutions," Policy Contributions 755, Bruegel.

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