An Orderly Market-Based Approach to the Restructuring of Eurozone Sovereign Debts Obviates the Need for Statutory Approaches

Author: Nouriel Roubini  ·  November 28th, 2010  ·  260070http%3A%2F%2Fwww.economonitor.com%2Fnouriel%2F2010%2F11%2F28%2Fan-orderly-market-based-approach-to-the-restructuring-of-eurozone-sovereign-debts-obviates-the-need-for-statutory-approaches%2FAn+Orderly+Market-Based+Approach+to+the+Restructuring+of+Eurozone+Sovereign+Debts+Obviates+the+Need+for+Statutory+Approaches2010-11-28+15%3A13%3A28Nouriel+Roubinihttp%3A%2F%2Fwww.economonitor.com%2Fnouriel%2F2010%2F11%2F28%2Fan-orderly-market-based-approach-to-the-restructuring-of-eurozone-sovereign-debts-obviates-the-need-for-statutory-approaches%2F › Share This Print

Ireland is now on the verge of following Greece into the Land of Lost Market Access. At the same time, sovereign spreads continue to widen for the rest of the PIIGS (especially Portugal but also for Spain and Italy). If, as appears likely, Ireland ends up losing market access, the short term response of the EU will be feature a rerun of last spring’s Greek solution: kicking the can down the road with a bailout package (a combination of EFSF support and IMF loans) to prevent systemic contagion spreading to the rest of the eurozone and to global financial markets. The same prescription awaits should Portugal lose market access in the next few months.

The EU implicit view holds that, even if “bail-ins” of private investors—via coercive restructurings of public debt—eventually become unavoidable, better to postpone them a couple of years and hope that the time thus gained will ring-fence Spain. Unlike Greece, Ireland and Portugal, whose loss of market access can be supported with official financing (EFSF, EU and IMF) for the next three years, Spain is too big to fail but also too big to save or to bail out. Thus, kicking the can down the road for the three little PIIGS now facing greater short term risk of distress is the EU’s preferred strategy. The hope, of course, is that this buys time for ­an orderly restructuring of the debt of these countries—a restructuring which would be less disorderly and with less systemic effects if Spain can in the meanwhile implement fiscal and structural policy.

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• EXECUTIVE SUMMARY
• INTRODUCTION
  1. The ‘Rush to the Exits’ Externality
  2. The ‘Rush to the Courthouse’ Externality
  3. The ‘Free Rider’ or Holdout Externality
     1. The CDS Bugaboo
  4. The ‘Debtor-in-Possession Financing’ Externality
  5. The ‘Systemic Risk’ Externality
  6. Other Alleged ‘Red Herring’ Externalities or Market Failures
• CONCLUSIONS