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Sovereign bond pricing in the euro area: When legal clauses matter

Marcos Chamon, Julian Schumacher, Christoph Trebesch, (2018), “Sovereign bond pricing in the euro area: When legal clauses matter”, VoxEU, 6 November

The discussion on sovereign debt restructuring in the euro area has recently focused on legal considerations, in particular on whether the legal framework should be reformed to make restructurings more ‘viable’, for example via new collective action clauses (Bénassy-Quéré et al. 2018, Tabellini 2018, Pisani-Ferry and Zettelmeyer 2018).

Should sovereign debts in Europe be ‘hard’ or ‘easy’ to restructure? The fundamental trade-off behind this question is well understood, at least theoretically (e.g. Bolton and Jeanne 2007, 2009, Pitchford and Wright 2007, among others). Debt that is easy to restructure is clearly preferable following an adverse shock, since it facilitates a quicker resolution of a debt crisis ex post. However, bonds that are easier to restructure may be perceived as junior and carry higher risk premia, thus raising the ex ante borrowing costs for the governments. In line with this reasoning, Tabellini (2018) argues that a reform to facilitate restructurings in the euro area may increase bond yields, especially in highly indebted countries, and could thus be destabilising.

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