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.
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Notes
- 1.
According to recital 14 of Council Regulation (EC) No. 974/98 «it is desirable to allow issuers of debt to redenominate outstanding debt in the euro unit; (…) » and «issuers should be enabled to redenominate outstanding debt if the debt is denominated in a national currency unit of a Member State which has redenominated part or all of the outstanding debt of its general government».
- 2.
Still in force after several amendments, the last one introduced by Council Regulation No. 827/2014, of 23 July 2014, regarding the introduction of the euro in Lithuania (OJ L 228, 31.7.2014).
- 3.
Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, The Netherlands, Austria, Portugal and Finland (1999) Greece (2001) Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014) and Lithuania (2015).
- 4.
See Issing (2008).
- 5.
See European Central Bank (2011).
- 6.
See Kopf (2011).
- 7.
See De Grauwe (2011).
- 8.
See article 12/3 of the ESM Treaty: «Collective action clauses shall be included, as of 1 January 2013, in all new euro area government securities, with maturity above 1 year, in a way which ensures that their legal impact is identical».
- 9.
Inducing investment integration, increased trade in goods and services and in cross-border mobility of labor, bringing higher synchronization of business cycles among Member States as argued by Charles Wyplosz (2016, pp. 103–118).
- 10.
According to the first set of indicators of financial integration in the euro area published by the ECB in 30 September 2005 (European Central Bank 2005), although banking and equity markets were less integrated, government bond markets were significantly integrated even before the start of EMU. The indicators for the corporate bond market pointed to a high degree of integration and the unsecured money market has been fully integrated shortly after the introduction of the euro (see https://www.ecb.europa.eu/pub/pdf/other/indicatorsfinancialintegration200509en.pdf?006e28de34fde544bdbd77a82c66c291). Since then the work on financial integration has evolved and has resulted in the publication of a yearly report available at https://www.ecb.europa.eu/pub/pub/prud/html/index.en.html.
- 11.
See De Grauwe (2013).
- 12.
See the ECJ Decision in the Pringle Case (C-370/12) where is was stated «that Article 123 TFEU is addressed specifically to the ECB and the central banks of the Member States» and that «the grant of financial assistance by one Member State or by a group of Member States to another Member State is therefore not covered by that prohibition» (recital 125). It was further added «that it is the ESM which grants financial assistance to an ESM Member» and that «even if the Member States are acting via the ESM, the Member States are not derogating from the prohibition laid down in Article 123 TFEU, since that article is not addressed to them» (recital 126).
- 13.
See Pipkorn (1994, p. 275) and Smits (1997, pp. 77–78). See also the ECJ Decision in the Pringle Case (C-370/12) where is was stated that «article 125 TFEU does not prohibit the granting of financial assistance by one or more Member States to a Member State which remains responsible for its commitments to its creditors provided that the conditions attached to such assistance are such as to prompt that Member State to implement a sound budgetary policy» (recital 137); that «the instruments for stability support of which the ESM may make use under Articles 14 to 18 of the ESM Treaty demonstrate that the ESM will not act as guarantor of the debts of the recipient Member State. The latter will remain responsible to its creditors for its financial commitments» (recital 138). The ECJ concludes that «The granting of financial assistance to an ESM Member in the form of a credit line, in accordance with Article 14 of the ESM Treaty, or in the form of loans, in accordance with Articles 15 and 16 of the ESM Treaty, in no way implies that the ESM will assume the debts of the recipient Member State. On the contrary, such assistance amounts to the creation of a new debt, owed to the ESM by that recipient Member State, which remains responsible for its commitments to its creditors in respect of its existing debts. It should be observed in that regard that, under Article 13(6) of the ESM Treaty, any financial assistance granted on the basis of Articles 14 to 16 thereof must be repaid to the ESM by the recipient Member State and that, under Article 20(1) thereof, the amount to be repaid is to include an appropriate margin» (recital 139).
- 14.
The clause of non-liability must not be confused with a prohibition of financial help or support, since its purpose is not to avoid financial aid to States which are in difficulties. Article 122 TFEU provides for the possibility—by way of exception and duly justified—of the European Union (and not the other Member States) to adopt “measures appropriate to the economic situation” or to “grant financial assistance” to a Member State. It was under this legal basis that Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilization mechanism (OJ L 118, of 12.5.2010) was approved. This provision was later circumvented by the European Council Decision of 25 March 2011, amending Article 136 of the TFEU with regard to creating a stability mechanism for Member States whose currency is the euro (2011/199/EU), where it is assumed that Article 122(2) of the TFEU will no longer be used in situations of risk to the financial stability of the euro area as a whole, as have been experienced in 2010 (see recital 4). Such situations would be dealt by creating a specific stability mechanism to be activated when “indispensable to safeguard the stability of the euro area as a whole”. Such specific stability mechanism was created by an intergovernmental treaty establishing the European Stability Mechanism (ESM) signed by the euro area Member States on 2 February 2012. The ESM was inaugurated on 8 October 2012 upon ratification and has provided financial assistance to Spain for the recapitalization of its financial sector (the Financial Assistance was provided by the EFSF and then transferred to the ESM), and is providing financial assistance to Greece (Third Economic Adjustment Programme for Greece) and Cyprus.
Before this EU Council decision, financial assistance to Greece was provided via bilateral loans pooled by the European Commission (the so-called “Greek Loan Facility”) for a total amount of 80 billion euros to be disbursed over the period May 2010 through June 2013 and through IMF support (30 billion euros) (First Economic Adjustment Programme for Greece) and financial assistance to Ireland, Portugal and Greece (Second Economic Adjustment Programme for Greece) was provided by the European Financial Stability Facility (EFSF), a société anonyme incorporated by the euro area Member States in Luxembourg, on 7 June 2010, with the purpose of providing financial support to euro-area Member States that lost access to financial markets.
On this issue see Louis (2010, pp. 975–986), Ruffert (2011, pp. 1777–1806) and De Gregorio Merino (2012, pp. 1613–1646).
- 15.
Council Regulation (EC) No 1466/97.
- 16.
Council Regulation (EC) No 1467/97.
- 17.
The Eurosystem’s regular open market operations consist of 1-week liquidity-providing operations (main refinancing operations, or MROs) as well as 3-month liquidity-providing operations (longer-term refinancing operations, or LTROs).
- 18.
- 19.
On this issue see Wolswijk and de Haan (2005).
- 20.
Available at http://www.igcp.pt/gca/?id=107
- 21.
- 22.
See the statement by Head of State or Government of the Euro Area and EU Institutions of 21 July 2011 where it was mentioned that “Greece requires an exceptional and unique solution” and that “all other euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole.”
- 23.
See on this topic Sáinz de Vicuña (2014, p. 192, 2013, pp. 15–24). The author supports the view that “a statutory system for sovereign debt workouts can be built upon the already-existing institutional set-up with a Court of Justice, an independent Commission, a powerful ESM as possible financier of fiscal consolidation, and the expert advice of the ECB (…)” but considers that such an initiative must be kept on hold during the current financial crises since it might be counterproductive at this juncture (see first work quoted, pages 191–192).
- 24.
- 25.
- 26.
According to Reuters the current holdings of Greek debt by private investors amounts to 38.7 billion euros following the debt swap of 2012. There are 15 billion euros in short-term Treasury bills hold by Greek banks and the remaining stock is held by the official sector (see http://www.reuters.com/article/us-eurozone-greece-debt-factbox-idUSKCN0P80XW20150628). Therefore it makes little sense to involve the private sector in further debt restructuring operations. On this topic see the comments of Gros (2016), referring that “today Greece has only a few private-sector obligations” and that “Eurozone governments are the ones offering large amounts of funding”.
- 27.
- 28.
See Moody’s Investors Service (2012).
- 29.
This seems to be the opinion of Antonio Sáinz de Vicuña (2014, pp. 182–183).
- 30.
See Gros (2014, pp. 195–204).
- 31.
The magnitude of such impact and spillover effects can be deduced from Lojsch et al. (2011).
- 32.
See “Group of Ten—The resolution of sovereign liquidity crises”, available at http://www.bis.org/publ/gten03.htm. See also Kopf (2013, pp. 153–157).
- 33.
- 34.
- 35.
- 36.
- 37.
- 38.
Available at https://www.imf.org/External/np/pdr/sdrm/2002/081402.pdf. See also Krueger (2002) and Olivares-Caminal (2014, pp. 334–344).
- 39.
The European Semester includes the formulation, and the surveillance of the implementation, of the broad guidelines of the economic policies of the Member States and of the Union (broad economic policy guidelines); the formulation, and the examination of the implementation of the employment guidelines; the submission and assessment of Member States’ stability or convergence programmes; the submission and assessment of Member States’ national reform programmes supporting the Union’s strategy for growth and jobs, established in line with the broad economic guidelines, with the employment guidelines and with the general guidance to Member States issued by the Commission (the annual growth survey) and the European Council at the beginning of the annual cycle of surveillance.
- 40.
Such deposits are converted into an annual fine in the case of continued non-compliance with the recommendation to address excessive macroeconomic imbalances within the same imbalances procedure.
- 41.
The European Fiscal Board is supposed to perform its tasks independently and to prepare its opinions autonomously from any national or European institution. The Board has been set up to provide the Commission with an evaluation of the implementation of the Union fiscal framework and to contribute to a more informed discussion of the overall implications of budgetary policies at euro area and national level in order to achieve an appropriate fiscal stance for the euro area.
- 42.
It is also mentioned that such stabilisation function should not be an instrument for crisis management since that is a task assigned to the European Stability Mechanism (ESM).
- 43.
See Capital requirements regulation and directive—CRR/CRD IV (Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms (CRR) and Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV)—and Council Regulation (EU) No 1024/2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.
- 44.
See the Bank Recovery and Resolution Directive (BRRD) (Directive 2014/59/EU) and Regulation (EU) No 806/2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism (SRM) and a Single Resolution Fund (SRF). See also the Agreement on the transfer and mutualisation of contributions to the Single Resolution Fund (IGA) signed by all EU Member States, except Sweden and the United Kingdom, on 21 May 2014.
- 45.
See COM(2015) 586 final—Proposal for a Regulation amending Regulation (EU) 806/2014 in order to establish a European Deposit Insurance Scheme.
- 46.
See the ECJ judgement of 16 June 2015, Case C‑62/14, Gauweiler et al., where the OMT programme was deemed compatible with articles 119, 123(1), 127(1) (2) TFEU and articles 17–24 of the ESCB Statute.
- 47.
- 48.
- 49.
- 50.
- 51.
«Risks for Portugal’s capacity to service its debt to the European Financial Stability Mechanism (EFSM) and European Financial Stability Fund (EFSF) remain low in the short-term. (…). In the medium to long-term, debt servicing risks will remain contained if Portugal shows greater resolve in fiscal consolidation and growth enhancing structural reforms. The debt sustainability analysis shows that following a moderate decline in the short term, the public debt-to GDP ratio stabilises in the medium-term at a high level and is vulnerable to macro-economic and financial-market shocks. Borrowing conditions for Portugal remain favourable, driven largely by European and global factors. However, financial markets have recently become more volatile, making financing the high levels of sovereign debt more of a challenge for the government» (quotation taken from the Post-Program Surveillance Report of April 2016, p. 6).
- 52.
- 53.
This amount was reduced by 2.7 billion euros, because Slovakia did not to participate in the GLF whilst Ireland and Portugal stepped down as they requested financial assistance as well.
- 54.
The financial assistance agreed by euro-area Member States was part of a joint package, with the IMF committing an additional 30 billion euros under a stand-by arrangement (SBA).
- 55.
Greece, Ireland and Portugal have become “Stepping-Out Guarantors” upon their request for financial support from the EFSF. The aggregate of the active Guarantee Commitments for the Guarantors which are not Stepping-Out Guarantors was 726,000.00 million euros.
- 56.
- 57.
As suggested by Bénassy-Quéré (2016) “In the medium term, the ESM could be turned into a fully-fledged treasury that would manage a crisis fund (the ESM itself) and possibly other funds (unemployment insurance, investment, refugees…)”. See also the proposal made by de Grauwe and Ji (2016) of using the ESM as a “stabilization fund” to finance Member States deficits during recessions (buying “national government bonds and issue an equivalent amount of ESM-bonds (Eurobonds) backed by the participating member countries”) and sell government bonds during booms (“buy back the ESM-bonds and sell the national bonds into the bond markets”) and the suggestion of Micossi et al. (2016) that the ESM could be used as a backstop to the proposed European Deposit Insurance Scheme (EDIS).
- 58.
On this subject-matter is important to look at the EU/EFSF/ESM presentations to investors, available at http://ec.europa.eu/economy_finance/eu_borrower/documents/eu_investor_presentation_en.pdf and http://www.esm.europa.eu/investors/index.htm, respectively.
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Court Cases
ECJ judgement of 27 November 2012, Case C-370/12, Thomas Pringle v. Government of Ireland
ECJ judgement of 16 June 2015, Case C-62/14, Peter Gauweiler and Others v. Deutscher Bundestag
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do Cabo, S.G. (2017). Sovereign Debt Restructuring in a Monetary Union: The Case of the Euro Area Member States. In: da Costa Cabral, N., Gonçalves, J., Cunha Rodrigues, N. (eds) The Euro and the Crisis. Financial and Monetary Policy Studies, vol 43. Springer, Cham. https://doi.org/10.1007/978-3-319-45710-9_12
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