Pâris, P. and Wyplosz, Ch., (2014) “PADRE: Politically Acceptable Debt Restructuring in the Eurozone”, 28 January.
The average public debt level of Eurozone countries now stands at 95.5% of GDP, and it is much higher in a number of countries. There is a lively debate about whether public debts can be too big and, if so, what the threshold is. At the very least, large public indebtedness is unhelpful, and at worst it is unsustainable. For many reasons, some of which are specific to monetary union, we take the view that in some countries the public debts are unsustainable, and will therefore not be sustained. If this conclusion is right, the choice is between orderly and disorderly debt cancellation. Given the tight economic and institutional integration of Eurozone countries, a disorderly debt restructuring by one country could easily trigger a systemic crisis of untold dimensions. This report presents a plan to restructure public debts in a way that is not just orderly, but also economically efficient and politically feasible. Economic efficiency requires that debt restructuring does not lead to systemic consequences such as bank crises. Political feasibility recognises that Eurozone member countries have forfeited de facto their right to decide whether and how to restructure their debts.1 It also recognises that the better-off countries are staunchly opposed to bearing the burden of any debt restructuring, either directly or indirectly via the ECB or the European Stability Mechanism (ESM), which the no-bailout clause of the European Treaty
(Art.125) indeed rules out.
The Politically Acceptable Debt Restructuring in the Eurozone (PADRE) proposal starts from the obvious observation that any debt restructuring involves costs that must be borne by someone.2 If the present value of the debt is to be reduced by, say, €100 billion, some people somehow will have to lose €100 billion. As suggested by the time-honoured permanent consumption theory, we consider that currently unsustainable public debts are a legacy of past policy errors and that the restructuring costs must be absorbed as gradually as possible. Imposing these costs on current debt holders has the merit of eliminating the moral hazard of debt write-offs, but it has the potential to create economic, and therefore political, havoc. A much better approach is to spread these costs across future generations. Since public debts have been accumulated at the national level, possibly reflecting poor institutions or irrational voter preferences, it makes good sense that the restructuring costs must also be incurred at the national level. This, in fact, is a key criterion of political acceptability. Of course, bailing out the current generation, in particular current debt-holders, represents a major moral hazard. For this reason, the debt restructuring must be organised in a way that minimises, possibly even eliminates, the moral hazard.
Download the full article here.
Relevant Posts
- Bastian, J., (2013), “Debt relief or debt restructuring for Greece?”, MacroPolis, The Agora Blog, 08 December.
- Beck, T. and Trebesch, C., (2013), “A bank restructuring agency for the Eurozone – cleaning up the legacy losses”, VoxEU, 18 November.
- Zettelmeyer, J., Trebesch, Chr., Gulati, M., “The Greek debt restructuring: an autopsy”, Vol., 28, Issue 75, pages 513–563.