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Euro Area Sovereign Debt: Restructuring Options

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Abstract

Countries with large debts stocks are vulnerable to the vagaries of the markets. Confidence crises can arise out of nowhere, constricting access to the markets. Hence, the question arises as to whether these countries should put in place mechanisms that will help them better prepare for the possibility of crisis. In effect, the choice is whether to buy insurance. The cost of buying such insurance is that the possibility that markets will see the sovereign’s proactive steps to protect against a crisis not as an indication of prudent governance but rather as an indicator that a crisis is imminent. In this article, we use the case of a hypothetical euro area country (Italy) with a large debt stock and a known vulnerability to confidence crises to set forth its options, as of 2019, to anticipate a possible future debt restructuring. It can: do nothing, do a little; and do something substantial.

Suggested Citation

  • Theresa Arnold & Mitu Gulati & Ugo Panizza, 2019. "Euro Area Sovereign Debt: Restructuring Options," IHEID Working Papers 18-2019, Economics Section, The Graduate Institute of International Studies.
  • Handle: RePEc:gii:giihei:heidwp18-2019
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    Keywords

    Sovereign debt; Italy; euro area; restructuring; local law advantage;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F54 - International Economics - - International Relations, National Security, and International Political Economy - - - Colonialism; Imperialism; Postcolonialism
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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