Wie die Euro-Zone ihre Schulden bewältigen kann
In this piece, Jean Pisani-Ferry and André Sapir talk about a recently proposed initiative – the European Crisis Resolution Mechanism (ECRM). They argue that the ECRM would ensure that the transformation of the European Financial Stability Facility (EFSF) into a permanent European instrument respects the two requirements agreed at the recent Franco-German and European summits: […]
In this piece, Jean Pisani-Ferry and André Sapir talk about a recently proposed initiative – the European Crisis Resolution Mechanism (ECRM). They argue that the ECRM would ensure that the transformation of the European Financial Stability Facility (EFSF) into a permanent European instrument respects the two requirements agreed at the recent Franco-German and European summits: very strong conditionality for loans to solvent countries and private sector involvement for countries with unsustainable debts.
Last May, at the height of the sovereign debt crisis, euro area leaders set up a temporary rescue fund for countries in difficulty, the European Financial Stability Facility (EFSF). No country has yet requested help from the EFSF, but there is persistent rumour that Ireland is about to so.
At their meeting in Deauville in mid-October, chancellor Merkel and president Sarkozy agreed to turn the EFSF into a permanent body before it expires in 2013, on condition that it includes provisions “for an adequate participation of private creditors”. In other words, private holders of euro area sovereign debt may be required to extend the maturity of their debt or even take a haircut on their holdings.
A few days after the Franco-German deal, European leaders agreed on the need to establish a “permanent crisis mechanism” requiring involvement of private-sector creditors, participation of the International Monetary Fund (IMF) and “very strong” conditionality on debtor countries.
The new mechanism could provide the institutional framework that the euro area needs to improve crisis prevention, crisis management and crisis resolution all at once. For the moment, however, the mere announcement of “private sector involvement” and the fact that a final decision “on the outline” of the new mechanism will only be made by European leaders in December have created market uncertainty and panic among investors.
While broadly supporting the Franco-German initiative and the subsequent decision by EU leaders, the proposal that our colleagues and us published a few days ago aims to clarify what a European Crisis Resolution Mechanism (ECRM) would look like and how it would operate.1 The ECRM would comprise of two pillars: a procedure for debt restructuring to be handled by the European Commission and the European Court of Justice; and a set of rules for the provision of financial assistance to be managed by the European Financial Stability Facility, which should be made a permanent EU institution.
The creation of the ECRM would contribute to crisis prevention by acknowledging that orderly sovereign debt restructuring is a real possibility in the euro area. This, along with necessary changes in financial regulation and supervision, would prompt creditors to better differentiate among sovereign debt issuers, thereby strengthening market discipline and improving sustainability of public finances.
The ECRM would also contribute to crisis management by making the EFSF, and therefore the possibility of financial assistance to euro area countries in difficulty, permanent. Like, and possibly together with, the IMF, the EFSF would be able to provide financial support to countries in difficulty by attaching strong conditionality, especially regarding future of debt sustainability.
Here we agree with Lorenzo Bini Smaghi, the ECB Executive Board Member, who recently declared that “there should be no automatic mechanism linking financial support to debt restructuring…for countries that are solvent”. In our view, and contrary to what is often heard in Germany, providing financial support to solvent countries would not violate the „no bail-out clause‟ of the EU treaty, which European leaders explicitly decided not to modify when they agreed to create the permanent crisis mechanism. Assistance to a solvent country cannot be equated with assuming responsibility for the country‟s debt, which is forbidden by the treaty.
At some stage, however, countries may become insolvent. At that stage, the ECRM would help both the debtor and its creditors first to recognise that debt has indeed become unsustainable and second to prevent financial market turmoil and costly delay in restructuring by providing an appropriate legal, economic and financial framework.
How would the resolution mechanism work once a country had recognized that its debt is unsustainable and requested that the mechanism be activated? First, a decision to open a debt-restructuring procedure would be made by the European Court of Justice after approval by the European Commission that the debtor‟s debt is actually unsustainable. Second, with the opening of the procedure the debtor would stop servicing its debt and there would be a stay on all litigation by creditors. The mechanism would apply to all creditors (within or outside the euro area, but excluding official bilateral and multilateral creditors) and all debt instruments liable to restructuring (issued within or outside the euro area). Third, the debtor would enter into negotiations with all its private creditors subject to the restructuring. The European Commission would provide evaluation to the parties as to the extent of the haircut (the private creditors‟ burden) and the future path of primary budgetary surpluses (the sovereign debtor‟s burden). An agreement approved by a qualified majority (say two thirds) of these creditors would be binding on them all. Fourth, once an agreement has been reached, the EFSF would provide financing to the debtor country to enable it to undertake the necessary economic adjustment towards fiscal sustainability.
The ECRM would therefore ensure that the transformation of the EFSF into a permanent European instrument respects the two requirements agreed at the recent Franco-German and European summits: very strong conditionality for loans to solvent countries and private sector involvement for countries with unsustainable debts.
1 See François Gianviti, Anne Krueger, Jean Pisani-Ferry, André Sapir and Jürgen von Hagen, /pdf-download/?pdf=fileadmin/files/admin/publications/blueprints/101109_BP_Debt_resolution_BP_clean_01.pdf
A version of this article was originally published in Handelsblatt
Republishing and referencing
Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.