EU plans easier restructuring of euro zone bonds from 2022: draft

LUXEMBOURG (Reuters) - European Union finance ministers are on Thursday discussing new rules that would make it easier to restructure euro zone sovereign bonds, a draft document shows - a move that could drive up yields of high-debt states.

European Union flags fly outside the European Commission headquarters in Brussels, Belgium, April 10, 2019. REUTERS/Yves Herman

Under the measure, part of a set of reforms that could be approved at Thursday’s meeting, holders of debt issued by one of the 19 euro zone countries would find their power to block bond restructuring or haircuts vastly reduced.

If approved, it would apply to bonds issued on or after Jan. 1, 2022 and with maturities above one year, the confidential document seen by Reuters says. Its proposed “single-limb aggregated voting” structure would allow decisions over bond restructuring to encompass all bonds issued by a state.

Existing clauses in euro zone bond contracts require separate restructurings for different types of bonds, making it easier for bondholders to block haircuts, or value reductions.

By helping prevent hold-outs from blocking a deal, the reform is designed to speed up the resolution of debt crises.

But critics are concerned it could increase yields on bonds of governments with high debt, as they would be perceived by investors as at greater risk of being restructured.

EU officials said the measures would be largely neutral on most countries, but some governments are still reluctant. France and Italy are among the skeptical states, two diplomats said.

France has a debt close to 100% of its output while Italy’s debt is above 130%, two of the largest proportions in the euro zone.

The measure is included in the overhaul of the treaty governing the European Stability Mechanism, the bloc’s rescue fund. It has been under discussion for month.

Officials said its final adoption may however be delayed to December to allow states to adapt their national rules to the new requirements.

Reporting by Francesco Guarascio; Editing by Toby Chopra and John Stonestreet