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

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 ESMTreaty. 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.