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Sovereign debt and its restructuring framework in the eurozone

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  • Ashoka Mody

Abstract

To compensate for the inflexibility due to fixed exchange rates, the eurozone needs flexibility through a system of orderly debt restructuring. With virtually no room for macroeconomic manoeuvring since the crisis onset, fiscal austerity has been the main instrument for achieving reduction of public debt levels; but because austerity also weakens growth, public debt ratios have barely budged. Austerity has also implied continued high private debt ratios, and these debt burdens have perpetuated economic stasis. Economic theory, history, and the recent experience all call for a principled debt restructuring mechanism as an integral element of the Eurozone design. Sovereign debt should be recognized as equity (a residual claim on the sovereign), operationalized by the automatic lowering the debt burden upon the breach of contractually specified thresholds. Making debt more equity-like is also the way forward for speedy private deleveraging. This debt–equity swap principle is a needed shock absorber for the future but will also serve as the principle to deal with the overhang of ‘legacy’ debt. Copyright 2013, Oxford University Press.

Suggested Citation

  • Ashoka Mody, 2013. "Sovereign debt and its restructuring framework in the eurozone," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 29(4), pages 715-744, WINTER.
    • Handle: RePEc:oup:oxford:v:29:y:2013:i:4:p:715-744
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    File URL: http://hdl.handle.net/10.1093/oxrep/grt029
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    Cited by:

    1. Schumacher, Julian & Trebesch, Christoph & Enderlein, Henrik, 2021. "Sovereign defaults in court," Journal of International Economics, Elsevier, vol. 131(C).
    2. Clemens Fuest & Friedrich Heinemann & Christoph Schröder, 2016. "A Viable Insolvency Procedure for Sovereigns in the Euro Area," Journal of Common Market Studies, Wiley Blackwell, vol. 54(2), pages 301-317, March.
    3. Lorenzo Esposito & Giuseppe Mastromatteo, 2019. "Defaultnomics: Making Sense of the Barro-Ricardo Equivalence in a Financialized World," Economics Working Paper Archive wp_933, Levy Economics Institute.
    4. Ernesto Longobardi & Antonio Pedone, 2018. "On some recent proposals of public debt restructuring in the Eurozone," Chapters, in: Giuseppe Eusepi & Richard E. Wagner (ed.), Debt Default and Democracy, chapter 6, pages 84-123, Edward Elgar Publishing.
    5. Consiglio, Andrea & Zenios, Stavros A., 2015. "The Case for Contingent Convertible Debt for Sovereignst," Working Papers 15-13, University of Pennsylvania, Wharton School, Weiss Center.
    6. Nicolas Carnot & Stéphanie Pamies Sumner, 2017. "GDP-linked Bonds: Some Simulations on EU Countries," European Economy - Discussion Papers 073, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. María del Carmen Ramos-Herrera & Simón Sosvilla-Rivero, 2020. "Fiscal Sustainability in Aging Societies: Evidence from Euro Area Countries," Sustainability, MDPI, vol. 12(24), pages 1-20, December.
    8. Dumitriu, Ramona & Stefanescu, Răzvan, 2020. "Iluzii financiare, Partea întâi [Financial Illusions, Part 1]," MPRA Paper 101201, University Library of Munich, Germany, revised 17 Jun 2020.
    9. Marco Committeri & Pietro Tommasino, 2018. "Managing sovereign debt restructurings in the euro zone. A note on old and current debates," Questioni di Economia e Finanza (Occasional Papers) 451, Bank of Italy, Economic Research and International Relations Area.
    10. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2017. "Heterogeneity in the debt-growth nexus: Evidence from EMU countries," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 470-486.
    11. Fuest, Clemens & Heinemann, Friedrich & Schröder, Christoph, 2014. "A viable insolvency procedure for sovereigns (VIPS) in the euro area," ZEW Discussion Papers 14-053, ZEW - Leibniz Centre for European Economic Research.
    12. Consiglio Andrea & Zenios Stavros A., 2018. "Contingent Convertible Bonds for Sovereign Debt Risk Management," Journal of Globalization and Development, De Gruyter, vol. 9(1), pages 1-24, June.
    13. Brooke, Martin & Pienkowski, Alex & Mendes, Rhys & Santor, Eric, 2013. "Financial Stability Paper No 27: Sovereign Default and State-Contingent Debt," Bank of England Financial Stability Papers 27, Bank of England.
    14. Cheung, Yin-Wong & Steinkamp, Sven & Westermann, Frank, 2020. "Capital flight to Germany: Two alternative measures," Journal of International Money and Finance, Elsevier, vol. 102(C).
    15. Julian Schumacher & Christoph Trebesch & Henrik Enderlein, 2015. "What Explains Sovereign Debt Litigation?," Journal of Law and Economics, University of Chicago Press, vol. 58(3).
    16. Trebesch, Christoph, 2015. "Kurzgutachten zu Staatsschuldenkrisen," Working Papers 06/2015, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    17. Lotfi, Somayyeh & Milidonis, Andreas & Zenios, Stavros A., 2024. "Mispricing of debt expansion in the eurozone sovereign credit market," Journal of Financial Stability, Elsevier, vol. 70(C).

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