A mechanism to regulate sovereign debt restructuring in the euro area

• Author: Lars P. Feld,Jochen Andritzky,Désirée I. Christofzik,Uwe Scheuering
• Date: 01 May 2019
• Published date: 01 May 2019
• DOI: http://doi.org/10.1111/infi.12142

© John Wiley & Sons Ltd wileyonlinelibrary.com/journal/infi International Finance. 2019;22:20–34.

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DOI: 10.1111/infi.12142

ORIGINAL MANUSCRIPT

A mechanism to regulate sovereign debt

restructuring in the euro area

Jochen Andritzky

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Désirée I. Christofzik

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Lars P. Feld

1,2

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Uwe Scheuering

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1

German Council of Economic Experts,

Wiesbaden, Germany

2

Walter Eucken Institute, University of

Freiburg, Freiburg, Germany

Correspondence

Lars P. Feld, Walter Eucken Institute,

University of Freiburg, Freiburg,

Germany.

Email: feld@eucken.de

Abstract

A missing element in the architecture of the euro area is a

mechanism for an orderly restructuring of unsustainable

sovereign debt. Clear rules for creditor participation in case

of overindebtedness would strengthen market discipline and

enhance the effectiveness of crisis assistance. We propose a

novel two-stage mechanism that allows for postponing the

crucial distinction between liquidity and solvency crises and

is part of the assistance provided by the European Stability

Mechanism (ESM). At the onset of a programme, the

framework includes an immediate maturity extension if the

debt burden is high. If post-crisis debt turns out to be

unsustainable, the debtor country can negotiate a deeper

debt restructuring. In addition, we introduce a gradual

transition phase into the new regime. As current debt

matures, it is replaced by a new class of bonds with Creditor

Participation Clauses (CPC), which are subject to the new

rules as mentioned above.

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INTRODUCTION

The recent reforms of the architecture of the European Monetary Union (EMU) build on the premise

that national governments are responsible for fiscal policy. In order to help member states to control

their indebtedness, the Stability and Growth Pact (SGP) was reformed and additional fiscal rules were

introduced. The European Semester and national fiscal councils were established. Despite these

measures, public debt remains high and future sovereign debt crises cannot be excluded.