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Sovereign Debt Restructuring in a Monetary Union: The Case of the Euro Area Member States

In: The Euro and the Crisis

Author

Listed:
  • Sérgio Gonçalves Cabo

    (University of Lisbon)

Abstract

“Sovereign debt restructuring” is often viewed as a panacea, a kind of miraculous solution for over-indebted Member States. In this article it is argued that in a monetary union characterized by a single monetary policy and financial market integration, public debt restructuring should be seen as the last option to avoid default by a euro area Member State, namely when there is a strong case for unsustainability of government debt in the medium to long term. Public debt sustainability goes hand in hand with the Maastricht fiscal criteria, EMU’s Stability and Growth Pact and its revisions of 2005 and 2011, and with the EU Treaties, including the Fiscal Compact and the ESM Treaty. Restructuring public debt is at the antipodes of economic policy co-ordination and convergence of euro area Member States sharing a common currency. It represents a major failure of the decentralized economic governance system that underpins the single currency. Based on the exceptional nature of “public debt restructuring” and taking into account the foundations of European Economic and Monetary Union (EMU), this article analyses the legal conditions for public debt restructuring in the euro area, focusing also on its financial and economic consequences. It looks at both the institutional approach and the contractual approach for debt restructuring, setting aside unilateral debt relief as equivalent to redenomination to the former national currencies and to exiting the monetary union. Alternatives to government debt restructuring in the euro area are also flagged in the context of the ESM Treaty, seen as an embryo for a European Union Treasury and for EU joint issuance of public debt. References to the Banking Union in its triple dimension of a single rulebook and Single Supervisory Mechanism (SSM), Single Resolution Mechanism (SRM) and European Deposit Insurance Scheme (EDIS) and to the Eurosystem’s Outright Monetary Transactions (OMT) in secondary sovereign bond markets are also made to reinforce the exceptional nature of sovereign debt restructuring in EMU.

Suggested Citation

  • Sérgio Gonçalves Cabo, 2017. "Sovereign Debt Restructuring in a Monetary Union: The Case of the Euro Area Member States," Financial and Monetary Policy Studies, in: Nazaré da Costa Cabral & José Renato Gonçalves & Nuno Cunha Rodrigues (ed.), The Euro and the Crisis, pages 173-195, Springer.
    • Handle: RePEc:spr:fimchp:978-3-319-45710-9_12
    DOI: 10.1007/978-3-319-45710-9_12
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    Cited by:

    1. Costa Cabral, Nazaré, 2020. "Sovereign Bond-Baked Securities in EMU:Do they mean accrued safety in the European sovereign debt market or simply a way to ‘privatize’ public debt?," MPRA Paper 102248, University Library of Munich, Germany.

    More about this item

    Keywords

    Sovereign debt restructuring; European Economic and Monetary Union;

    JEL classification:

    • K29 - Law and Economics - - Regulation and Business Law - - - Other
    • K39 - Law and Economics - - Other Substantive Areas of Law - - - Other

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