BRDO PRI KRANJU, Slovenia, Feb 2 (Reuters) - The euro zone’s bailout fund could in the future be at the centre of any restructuring of sovereign debt in the single currency area as part of reforms of the way the zone functions, the head of the fund said on Friday.
The main task of the European Stability Mechanism (ESM) now is to lend cash to governments that have been cut off from markets in exchange for reforms that put their economies back on track. It has helped Greece, Ireland, Portugal, Spain and Cyprus over the past few years.
The euro zone currently does not have any pre-defined debt restructuring rules to deal with a situation in which a government loses market access and has had to improvise on a case-by-case basis to crises.
This is partly because until the euro zone’s sovereign debt crisis erupted in 2010, in Greece, the government bonds of all its member states were considered equally safe and a default on debt was not considered.
During the Greek crisis, private investors had to accept the loss of half the value of the Greek bonds they held - the largest in the history of sovereign defaults and the first in the euro zone.
“The ESM could play a role in containing risks if member states were to define a Sovereign Debt Restructuring Framework to make settlements with private creditors more effective and transparent,” the fund’s chief Klaus Regling said in a speech.
Germany has proposed that a euro zone country that lost market access would have to restructure its debt automatically, for instance by extending maturities, to secure an ESM bailout. This would echo the principle of the International Monetary Fund that the IMF does not lend to countries with unsustainable debt. But others in the euro zone are wary of any automaticity.
“The (restructuring) framework should, in my opinion, not contain any automatic extension of maturities, while ‘Collective Action Clauses’ could be improved to prevent lengthy hold-out battles,” Regling told a seminar in Slovenia.
Collective action clauses help to prevent a situation where a small group of investors block a debt restructuring for all others because they demand better terms. After the Greek crisis, the euro zone introduced such clauses to all its newly issued bonds to help facilitate debt restructuring.
“If Europe were to agree to introduce such a framework, the ESM could provide the debt sustainability analysis, and help organising negotiations between creditors and the debtor, with the aim of a fair solution for all stakeholders,” Regling said.
The Greek crisis erupted because European Union fiscal rules that set limits on government borrowing were ignored.
Germany and several other northern European countries believe that creating a proper framework for sovereign debt restructuring in the euro zone would help improve government fiscal discipline through market pressure.
However, some southern euro zone countries with high debt, such as Italy, are strongly opposed, fearing such discussions may lead to markets selling off the bonds of economically weaker countries and triggering another crisis. (Writing By Jan Strupczewski; Editing by Gareth Jones)