Sovereign Debt Restructuring in the Euro Area

Euro area policymakers have recently agreed to enhance the framework for restructuring sovereign debt within the monetary union.

This paper reviews the existing process leading to sovereign debt restructuring, and identifies a number of aspects which limit its effectiveness and credibility. Reducing debt restructuring that is “too little too late” requires more accurate technical tools. It also requires a more transparent governance framework for evaluating debt sustainability, one which separates technical from political decisions.

If a technically more sound and less bias-prone debt sustainability analysis framework can be achieved, and if spillover costs can be adequately embedded into this framework, it seems the task would have been accomplished and additional reforms would not be necessary.

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