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Debt restructuring in the euro area: A necessary but manageable evil?

  • Zsolt Darvas

There are two possible responses to the Greek debt crisis: â??Plan Aâ??, continued official lending, for as long as needed, with possible voluntary private sector involvement, and â??Plan Bâ??, coercive pre-emptive or post-default restructuring with significant face value reduction. 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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Paper provided by Bruegel in its series Policy Contributions with number 567.

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Date of creation: Jun 2011
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Handle: RePEc:bre:polcon:567
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  1. 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.
  2. Barry Eichengreen, 2010. "The Breakup of the Euro Area," NBER Chapters, in: Europe and the Euro, pages 11-51 National Bureau of Economic Research, Inc.
  3. Zsolt Darvas & Christophe Gouardo & Jean Pisani-Ferry & André Sapir, 2011. "A comprehensive approach to the euro-area crisis: Background calculations," Working Papers 499, Bruegel.
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