The head of the Eurogroup of eurozone finance ministers said on Monday that he would seek guidance from European Union leaders on Friday on measures to facilitate eurozone public debt restructuring, a possibility one economist dubbed a “bombshell.”
The move is based on a joint proposal put forward last week by Germany and France, aimed at making it easier to restructure debt. The two most indebted governments in the euro zone are now Greece and Italy – both above 130 percent of GDP.
“Subject to guidance from the leaders, we may work further on a possible introduction of single-limb CACs for new issuances to prevent hold-outs,” Mario Centeno said in a letter sent to the president of the European Council Donald Tusk ahead of a EU summit on June 28-29.
CACs are collective action clauses in sovereign bond contracts which make it easier for a government to override a minority of investors who oppose the terms of a proposed debt restructuring, and who can stop the whole process by holding out for a better deal.
Bonds issued in the eurozone since 2013 have included CACs. But the introduction of the “single-limb” measure, as suggested by Centeno, would make the process much easier, because it would allow for a single restructuring decision to encompass all bonds.
Markets reacted with jitters when the Franco-German proposal was published last week. Lorenzo Codogno, a former chief economist and director general at the Treasury Department of the Italian Ministry of Economy, called the measure a “bombshell in the making.”
He said it could be especially dangerous for Italy, because it could increase servicing costs for its high public debt.
“Italy is in a fragile situation due to a very high public debt and these initiatives would produce an enormous risk,” he said.
Italy’s Finance Minister Giovanni Tria opposed the measure proposed by Berlin and Paris last week at a meeting of EU finance ministers in Luxembourg.
Centeno’s proposal largely replicates the Franco-German plan which is to help shift the burden of losses in case of sovereign insolvency from eurozone taxpayers, who have helped bail out Greece, Portugal, Ireland, Spain and Cyprus during the sovereign debt crisis, to private investors. [Reuters]