A. Baglioni, M. Bordignon – Sovereign debt restructuring: Rules vs Discretion
We discuss the proposal, recently circulated in the policy debate in the euro zone (EZ), related to the restructuring of the outstanding government securities of countries featuring a high level of the debt-to-GDP ratio. We believe that a clear distinction should be made between automatic restructuring rules and discretionary decisions on this matter. While the former are dangerous for their destabilizing potential, the latter can be seen with favor. We argue below (Section 1) that any restructuring solution should be left to the decision process related to the financial assistance of the ESM; the legal framework for imposing a restructuring as a condition to get the ESM aid is already in place and compelling reasons to revise it do not seem to exist. The design of Collective Action Clauses (CAC) can instead be improved by introducing the so-called “single limb aggregation” rule: one vote for all the bonds involved in a restructuring offer, rather than for every single issue.