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Managing Deep Debt Crises in the Euro Area: Towards a Feasible Regime
Author(s) -
Zettelmeyer Jeromin
Publication year - 2018
Publication title -
global policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.602
H-Index - 33
eISSN - 1758-5899
pISSN - 1758-5880
DOI - 10.1111/1758-5899.12571
Subject(s) - debt restructuring , credibility , restructuring , debt , debt crisis , internal debt , economics , creditor , monetary economics , external debt , debt levels and flows , financial system , sovereign debt , recourse debt , international economics , debt to gdp ratio , business , sovereignty , finance , politics , political science , law
In spite of the inclusion of collective action clauses (‘euro‐ CAC s’) in euro area sovereign bond contracts since 2013, the euro area still does not have a credible debt restructuring framework because: (1) stability risks of debt restructurings remain high; (2) euro‐ CAC s make it easy for creditors to hold out for full repayment; (3) IMF lending policies have not prevented the bail‐out of countries with unsustainable debts. In reaction, some proposals have called for hard criteria requiring debt restructuring as a condition for access to official crisis lending. This paper argues that this is the wrong approach, because hard criteria are error‐prone, may trigger crises in high‐debt countries, and lack credibility when the economic costs of debt restructurings are high. Instead, the key to a credible debt restructuring framework is to reduce these costs, by cutting the links between sovereigns and banks and putting safety nets in place that limit contagion.