Showing posts with label debt restructuring. Show all posts
Showing posts with label debt restructuring. Show all posts

Saturday, January 17, 2015

17/1/2015: Is QE permanent and do we need a Government debt 'deletion'?


In a far-reaching comment on the QE and its true nature, published back in 2013 (see here: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9970294/Helicopter-QE-will-never-be-reversed.html),  Ambrose Evans-Pritchard took the arguments of several economists and drew, with them, a very far reaching set of conclusions.

To summarise these:
1) QE is permanent - it cannot be undone. I agree.
2) Better than that, QE should be used to cancel legacy Government debts, providing deficit financing ex post facto. I agree only partially.
3) QE should be expanded to a stand by facility to fund aggregate demand via funding future deficits. I disagree.

Why would I disagree with the 2 latter points?

Reason 1: Government debt is not the biggest problem shared by all economies today. In some economies, such as Greece, Italy and US, for example, it is the main problem. But in other economies, such as Ireland and Spain, for example, it is secondary to household and corporate debts. This means that even if economic growth restarts on foot of the above 3-points plan, the reversion to 'normalcy' in interest rates will simply crash legacy debt-holders. No amount of fiscal stimulus will be able to undo this damage.

Reason 2: Government deficits and debts did not arise from purely automatic stabilisers (or in simple terms solely from the disruptions caused by the Global Financial Crisis) in all economies. In some countries they did, as, for example in Italy and France. In others, they came about as the result of imbalances in the economy that drove large asset bubbles, e.g. Ireland and Spain. In yet other countries they were systemic, e.g. Greece and Italy. The 3-points plan can help the first set of countries. Can do damage to the second set of countries (via interest rates channel and/or by generating another bubble) and will provide no incentives for change for the last set of countries.

There are other arguments as to the fallacious or partially fallacious nature of points 2 and 3. These include the arguments that public spending creates own bubbles - those in wages and salaries, employment and practices in the public sector, or those in rates of return for politically connected businesses or those in public infrastructures that will have to be maintained and serviced over decades to come, irrespective of the economic returns they might generate. They also include the arguments that public spending and investment can crowd out private spending and investment. As well as arguments that in a number of countries, especially within the euro area, public spending as already hefty enough and priming it up using monetary financing today is setting us up for creating a permanent future liability to continue funding the same out of tax revenues into perpetuity after the QE funding is completed.

The key, however, is the problem of total debt distribution, not just of Government debt volumes. A 'delete' button must be pushed, I agree. But what we will be deleting has to be much more complex than just the Government debt. In some countries it will have to also include private debts. And for that, we have not had a QE devised, yet...

Monday, January 13, 2014

13/1/2014: Seeking MEPs support for legacy debt resolution?


Today, Irish Times is covering the intention of the Minister Noonan to seek support for a retrospective debt deal for Ireland from the EU MEPs. Here's the full article: http://www.irishtimes.com/news/politics/noonan-to-seek-meps-support-for-debt-relief-over-banks-1.1652911

Couple of thoughts in relation to this intention:

  1. This is the 7th year since the ill-fated banks guarantee that started the process of transfer of banking sector losses away from (some) investors in the banks (majority of unsecured and all secured and senior bondholders)  to the taxpayers. This, it appears, is the first instance in which the Irish Government is officially attempting to enlist support for the retroactive resolution of these transfers from the EU MEPs. Why? The Ireland Says No campaign of ordinary citizens and residents of the state have requested such assistance in a number of meetings with the MEPs. People like myself, whenever asked to brief the MEPs on the issues relating to the banking crisis have done so on a number of occasions. Irish Government, it seems, is only now coming around to a realisation that having MEPs support can be of value in addressing the problem? Why? I spoke to the ECON committee members some 6-8 months ago and asked them to support Ireland's efforts. Why is the Irish Government only now officially attempting to do the same?
  2. Per article: "The argument that Ireland’s significantly high debt to GDP ratio of almost 120 per cent means that it needs further debt relief has emerged in recent months as a key strand of the Government’s campaign to secure support on legacy bank debt." Why? Sustainability of our debt has been , allegedly, tested by the Department of Finance, by the Central Bank, the Troika etc, and yet none of these entities and organisations ever once voiced any serious concern with sustainability of debt. How can the same Government that continues to claim that everything is sustainable, that Ireland is in a recovery, that we will repay every red cent of our debts etc etc etc now turn around and credibly claim that "it needs further debt relief"? What has changed "in recent months" to alter Government position? Did Government alter its position?
  3. In June 2012, Irish Government announced that it has reached - claiming its own effort to credit - a 'seismic deal'. There were no qualifiers used, no caution given, no room for 'may be it won't happen' doubts allowed. The deal was the deal and that was it: Ireland was to get retroactive debt relief. Since June 2012, this 'seismic' deal was thrown like a proverbial banana peel into every gathering of voices doubting the Government achievement or debt sustainability dogma. And now, is Minister Noonan finally admitting there is no deal? Because if the deal is just a matter of time - an 'when' not an 'if' - and has only to wait until the SSM comes into force, then why does Minister Noonan need the MEPs support?

Lastly, as the readers know, this blog position has been that Ireland's total economic debt levels (household, Government and non-financial corporate, combined) are not sustainable. Non-sustainability  of debt in the context of my arguments always involved the view that Ireland is facing a choice: either fund current levels of debt and face long term structural collapse of growth in this economy, or we will need to restructure our debts. In terms of restructuring our debts, I have consistently suggested that the best target would be banks liabilities. The opposing side in the argument always put forward the planned/projected declines in debt/GDP ratio starting with 2014 as a sign of debt sustainability. the cost of such 'reductions' in debt liabilities on the economy (growth and investment effects) and society (health, psychological costs, social costs etc) never phased those who argued that the debt is sustainable. The Government has expended significant effort attempting to argue against the view that our debt is not sustainable. Is the same Government now directly agreeing with the positions they disputed? Are they really saying that we are facing a risk to our debt sustainability?

Setting aside the above issues, if Minister Noonan is indeed committed to seeking MEPs support for a retroactive debt relief for Ireland in relation to the debts related to our banking crisis, I am happy to help in any way I can. it's been long (too long) overdue.

Monday, July 2, 2012

2/7/2012: 16 issues with ESM 'deal'



This is the second post for this blog on the latest Euro area ‘deal’ struck early morning last Friday – the ‘deal’ that is thin on details (see statement here http://trueeconomics.blogspot.ie/2012/06/2962012-deal-preliminary-reaction.html) and even thinner on actual commitments (as in ‘new commitments’ not ‘repeated old commitments’).

(1) The core ‘commitment’ in the deal is the possibility that – once “effective single supervisory mechanism is established” (which may or may not take long – depending on whether the already existent EBA structure can be seen as ‘effective’ and whether it can be enhanced with real supervisory powers to oversee EA17 states, who are yet to agree such enhancements and such oversight) “the ESM could, following a regular decision, have the possibility to recapitalize banks directly” (so on top of establishing a common supervisory structure and endowing it with sufficient powers, the member states are yet to endow ESM with ‘regular decision’ powers to recap banks).

Assuming that such possibility is indeed delivered upon, this would allow banks recapitalizations via ESM instead of directly via sovereign funds and thus will – for accounting purposes – prevent banking debt being counted directly as Government debt. This is the positive and it is a significant positive, for Europe.

However, it has limitations, although it also delivers some potential positives. A mixed bag overall for Europe.

(2) Irish experience shows that – with Nama debt not officially counted as Exchequer debt, while Promissory Notes to IBRC and interest on them is counted as such. Both are fully backed by Government and both have economic implications, but only one (Promo Notes) has implication for sovereign finances. In other words, removing for accounting purposes debt off Government balancesheet does not remove the costs and burdens of this debt off the balancesheet of the economy as a whole. What this means is that the ‘deal’ does not share responsibility for debt across the Euro zone, as long as there remain Government guarantees. Instead it spreads debt into the economy (as banking system will still have to repay them), putting taxpayers into the second line of fire.

Incidentally, Nama – that vehicle which absorbed some of the banks bailouts – is highly unlikely to be featured in any potential/theoretical/rumoured/alleged retroactive restructuring of the banks-related sovereign debt.

This also means that the deal does not fully break the link of contagion from banks bad debts to Government balancesheet, but makes this link more opaque.

(3) There is no retrospection in the deal, although the Irish Government claims there is. We hope there can be such retrospection, but it is difficult to see how that can be delivered given that
a) Retrospection would open ESM to some €200 billion worth already committed Governments’ funds from the peripheral and other states (including Germany), effectively erasing 40% of ESM capacity before it gets to lend to any new states (e.g. Italy and Spain).
b) Retrospection in any case would not apply to non-debt funds committed by the Irish state (some €21 billion in NPRF cash paid in already).
c) Retrospection could challenge some of the requirements for conditionality (as it cannot be covered by any new conditions) and any potential requirements for collateralization (see below).

The Irish Government is so convinced that retrospective deal is possible, it has set the target of 17% of GDP for debt writedown (see: http://www.irishtimes.com/newspaper/breaking/2012/0702/breaking4.html) which will require a restructuring of €34 billion and if achieved will be a significant help to the Exchequer, although doubtful in value to the economy at large.


(4) The deal clearly states that the banks bailouts will be subject to the "appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalized in a Memorandum of Understanding." In other words, the conditions will not be universal for all states, but will be granular – specific to individual environments. Render onto… comes to mind, and the Caesar – Italy, Spain, any other large member state, is not the same as Ireland, Cyprus, Portugal, Greece et al.

(5) The ESM itself is, at this stage, still not set up and, more importantly, has not raised any funds. When operational it will have capacity to raise €500bn which is highly unlikely to be sufficient to cover sovereigns’ own needs, let alone underwrite any significant banks bailouts. If current EFSF participants were allowed to roll into ESM their banks’ exposures along with Spain, the ESM will have to allocate some €200 billion or so of funds to existent programmes, leaving €300 billion or so to fund other banks bailouts that might arise and fund Exchequers’ needs outside banks bailouts. Thus, ESM will be faced with a dilemma – either it acts as a somewhat credible banks bailout fund or a somewhat credible support for Government bonds. So far, under any of the existent proposals, it cannot do both. Were such proposals to be put in place in the future (e.g. leveraging via ‘banking license’ etc – explicitly excluded from the ‘deal’), the ESM will have to balloon well past €1 trillion mark.

Absent such proposals for ESM structure, the ‘deal’ says that ESM will be allowed to directly intervene in the markets to purchase Government debt. This is not new – in fact it was always supposed to do so.

(6) ESM structure remains unchanged under the deal, so the fund will go to the funding markets with a backing of collective guarantees of the member states. The internal backing of credit flows within ESM is that of the guarantees by the borrowing states to the fund – same as in the EFSF – except absent subordination. This can mean two things:
a) ESM will have to pay more for borrowing in the markets, and
b) ESM might face severe difficulties, similar to those experienced by the EFSF, in raising funds.
The things are getting so tight with the ESM (even before it is launched) that within the ESM set-up, the combined "guarantees" by the peripheral states borrowers from the EFSF/ESM plus Italy to ESM creditors are proportionately in excess of the guarantee provided by Germany.

However, on the positive side here, removal of subordination clause from ESM lending affirms to private lenders to national Governments the equal treatment of their bonds with supra-national ESM debt. In the long run, therefore, this should reduce risk premia for those member states still capable of tapping the private markets for debt. Thus, making things harder for ESM might make things easier for Germany & Co.

(7) ESM structure of guarantees is itself a troubling scheme. When Spain receives the bailout funding, its share of ESM funding and guarantees will be reallocated to other member states. Germany’s share will move from 29% to 33%, Italy’s share from 19% to 22%, France’s from 22% to 25% and so on. Two weaker Euro area states – Italy and Belgium – will become larger guarantors of ESM. And France, which wants effectively to expand ESM and to grow the overall euro area debt pile to finance own agenda. More fun? Unwilling participants to the scheme – Finland, Austria, the Netherlands – all are getting more ‘voting’ power in the ESM too. Which, of course, should make the whole ESM proposition even more risky in the eyes of external investors.

(8) ESM structure under the ‘deal’ is reinforced by the compulsion of the borrower state to comply with strict and specific conditions. To maintain credibility, therefore, ESM will require these conditions to be at least as stringent as those imposed under the EFSF (Troika) deals. The problem, alas, is that no country, save Ireland, to-date has been able to comply with the previous conditions and the entire mess we are in today was triggered (not caused) by Greece and Spain refusing to comply with these conditions.

This means that either ESM will have to offer its own funders much lesser security (higher risk of borrowers from ESM not being able to deliver internal adjustment programmes necessary for repayment of ESM funds) or it will have to avoid buying Spanish and Greek debts. Alternatively, the ESM lending will have to come with even stricter conditions to compensate for the lack of subordination, which is clearly unviable in current political environment.

(9) To secure ESM funding, the member state applying for the funds will be required to sign an agreed Memorandum of Understanding (as with Troika) which then will have to be approved by other member states. In the past, Finland, the Netherlands, Austria and Slovakia, not to mention Germany, have opposed to some conditions that would have allowed easier access to ESM funds. Specifically, some countries on the list have demanded use of collateral to secure lending even with assumed (under previous ESM plans) and actual (under EFSF) super-seniority conditions. What these and other countries might demand from the ESM funding recipient state is, thus, completely unclear and uncertain. The same applies to ESM lending to the banks, with an added caveat – conditions for banks will have to be even more strict.

We are now, therefore, facing a possibility that the collateral for loans debate can be reignited.

(10) Pretty much everyone agrees that the only lasting resolution to the crisis will have to arrive via ECB. Yet, to-date, ECB has been reluctant to engage even with the crisis spinning out of control. If the latest agreement de facto injects more funds in support of the banking and sovereign balancesheets, the current deal can actually result in even lower willingness of ECB to engage. In other words, the ECB might play a wait-and-see game, allowing the ESM to become fully engaged and only thereafter, assuming the crisis remains acute, stepping in. In other words, instead of deploying monetary policy upfront, we might see Euro area first increase its overall level of indebtedness via ESM and only after that move for the aggressive deployment of the monetary policy. As we know, this has happened in Japan and it has shown the weakness of the monetary policy at the time of elevated debt crisis.


(11) On a positive side, we must recognize that the deal explicitly recognized two things:
a) Germany no longer holds total power over the Euro area decisions,
b) A Euro area state should not be forced to accept bankruptcy level debts in order to underwrite banking system solvency (although there is yet to be a realisation on the side of same happening to the economy)


(12) Also on a positive side, it appears that likely outcome of common supervision regime will include deposits guarantee and banks insolvency resolution regime. Both are net positives and both are consistent with my long-held views on what should be done to repair Euro area banking system. Alas, the resolution regime will have to come ex post already adopted measures, so it is unlikely to make material difference to the banking system we currently have.


(13) A unified banking supervision itself might be a tight spot. Suppose it is set up. And suppose it is functional. In this case, any Euro area banking regulator will be faced with a problem – banks under his/her supervision holding massive and increasing exposures to the sovereign debt of their own governments, some of which are in ESM. There is a clear-cut case here to be made that this situation cannot be sustained. However, should the Euro area regulator move to curtail, say Italian or Spanish banks buying more of their Governments debts, there will be effectively an end to these countries participation in the funding markets and a larger call on ESM. Alternatively, should the regulator ignore the problem of accumulating risks, the regulatory system itself can be undermined.


(14) The deal – and especially the path that it took to arrive at – is the example of European policy brinkmanship, not cooperation. All accounts show that the meeting was broken by Mario Monti with support of Rajoy and that Hollande provided back up. There is absolutely no argument to make that any other member state was explicitly on their side, although most likely Ireland and Portugal were only happy to ride on the coattails of the opposition. Either way, the whole process of deriving the deal was not a cooperative solution, but a stand-off. This is not a break from the established pattern of past summits. But equally ominously, the latest success of brinkmanship is underpinned not by the change in the Euro area leaders’ positions, but by changes in the electoral landscape in Europe, with opposition to the status quo growing on the side of the ‘rebels’ in Greece (Syriza), Italy (Five Star), France (recent lections shift toward more extreme parties support), Finland (the True Finns), Germany and so on.

(15) In the end, ESM will not resolve the problem of too much debt accumulated on the shoulders of European sovereigns and dysfunctional banking system. The economies involved – Spain, Ireland, Greece, Portugal, Cyprus, and potentially Italy – are simply incapable of repaying these debts (please, do consider that even under the rosy Irish Government scenarios – the best performer in the group – Government debt reductions envisioned post 2014 are minor and mostly driven by economic growth, not repayment of actual debts). With this, the ESM can become a perpetual lender, with the requirement to continue raising funds well past the envisioned 10-15 years period. Any cyclical recession before then or after will derail repayments and the ESM debt will have to simply rise, risking a debt spiral that we are experiencing today replaying at some point in the future. Not a pretty thought and certainly a risk that the ‘game changer’ of the ‘deal’ might end up being the ‘end-game’ losing move.


(16) The deal does provide some room for ECB to claim that now there is a realistic progression toward more centralized oversight over banking sector and thus it can engage more actively in monetary easing. The signal to watch for is the ECB 1% repo rate, which can be lowered, implicitly signalling ECB willingness to long-term tolerate inflation over 2%. Thereafter, 4% inflation becomes feasible and ECB can start priming the pump. In turn, devaluation of the euro will compensate German economy by boosting exports and will put even more pressure on internal devaluations in peripheral states (imports costs up, exports largely non-existent to benefit from cheaper euro, etc).

Today’s PMI figures showing broad euro zone-wide and sharp contraction in activity in June should make the ECB move this Thursday a ‘no-brainer’.




Friday, June 29, 2012

29/6/2012: The 'deal' - preliminary reaction

Overnight statement from the EA [emphasis mine]:

"We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution- specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. 

The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.

We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.


We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.
We task the Eurogroup to implement these decisions by 9 July 2012."


I note that there is NO retrospection in the above - a negative for Ireland. So far we have a statement from some Irish Government members not present at the summit who claim there is retrospective applicability, but as far as I am aware, this is NOT confirmed in any documentary evidence.

I also note that transfers to ESM from EFSF will be carried out "without gaining seniority status" de jure, although it will most likely still be de facto super-senior debt - a positive for Ireland.


It is worth noting furthermore that countries entering ESM without first obtaining funding via EFSF might be able to avoid facing a Troika-imposed set of conditionalities, but will be required to comply only with the internal EU rules (see here). This, however, does not seem to apply to countries like Ireland who will enter ESM from EFSF and, potentially (based on reading of the official statement) to countries that have obtained funding not solely for the purpose of recapitalizing their banks 9again, precluding Ireland from softening of conditionalities).



Per Enda Kenny (via RTE):

  • Ireland's government debt (not only banks-related) will be 're-engineered' in other words - it will be restructured (effectively a soft default). "Mr Kenny said the new deal means Ireland's overall debt burden, including the bank debt, can be re-engineered in a way which will give Ireland equal treatment to Spain and any other countries which avail of the new system."
  • "where funding is made available through the EFSF it will later be transferred to the ESM" so it is now the Government position that we will have a second bailout. 


So the Irish Government is de facto 'defaulting' and welcomes this. And it is going into the second bailout despite repeated claims that it will be funding itself via markets post 2013. And it welcomes this too. Reverse gear has not been used as much for some time on Merrion St.


I have consistently called both events as inevitable for Ireland. Hence, in my view, the 'deal' is a net positive. However, we cannot tell how positive it is yet.



One area of concern will be the treatment of the banks debt under ESM - with respect to seniority and any attached Government guarantees. In particular, in my view, if ESM were to assume directly unsecured banks debt, even with an attached explicit sovereign guarantee, such debt will have to adversely impact ESM cost of funding.

The biggest issue with the above statement is that it will NOT reduce overall economic debt carried by the EU states, including Ireland. The potential reduction in the cost of financing this debt is good news. The fact that this economy (not banks or some rich uncle in America) - aka us - are still on the hook for debts of insolvent banks remains.

Ditto for Euro area as a whole. You might call it 'Government Debt related to the banks', you might call it 'quasi-Government Debt related to the banks' or 'Non-Government Debt guaranteed by the Government to the super-senior lender related to the banks' or indeed a 'Pink Teddy Bear that stinks up the room' - the debt is... err... still there and there will be more of it post this 'deal'.


Update 1: some interesting thoughts - it appears from the EU statement that any euro area member state in compliance with fiscal constraints can apply for ESM funding of the banking sector measures. Now, if - as the Irish Government are claiming - such funding can be applicable to restructuring past sovereign exposures to banking sector, then:

  • As Belgium is already starting to signal, it can be applied  to €4 billion spent on Dexia Banque Belgique plus €54 in guarantees extended to the bank (link covering more current exposures potential), plus €6 billion in Franco-Belgian assistance the bank received back in 2008 (link).
  • Germany's €150 billion 'rescues' of Hypo and other banks via FMS (link here)
  • Austria - same Hypo (link here) but peanuts so far
  • Dutch Government pumped some €32 billion into its banks (link)
  • and so on...
Now, give it a thought - ESM is supposed to run at €500 billion absorbing existent EFSF up to €700 billion. So even if Spain just caps EFSF and it transfers to ESM, we have - before Italy comes waltzing in - ESM full capacity potential left after the banks bailouts are retrospected into it - of what? Some €200 billion max?.. or absent EFSF - at the announced running volume - nil.


This sort of suggests there is serious problem with an idea of allowing retrospective roll-backs of banks-related debt and measures to ESM...




Update 2: It appears that Enda Kenny's alleged contribution to the summit ('winning the deal for Ireland') is not a part of the record of the summit, at least as far as I can see (one example - here).


Update 3: H/T to Brian Lucey: this is just in - Germany apparently/allegedly wants ESM bank aid to be tied to acceptance of the Financial Transactions Tax. I suppose compliance with a harmonized corporate tax will be the condition too. In the end, the 'Enda deal' might just become a seismic event... So the logic of FTT link is therefore, in Irish context will be:
Step 1: EA leaders use Irish taxpayers to rescue own speculators and banks from Anglo/INBS etc default on bonds.
Step 2: EA leaders use FTT to demolish jobs in Dublin IFSC, so they can finance their 'growth package'?
The sort of the 'deal' we've been waiting for from our 'European partners'?


Update 4:  Citing Spiegel source, Global Macro Monitor blog states [emphasis is mine]: "What happens to the countries that have already received money from the temporary rescue fund, the EFSF? Officials in Brussels said that the new decision did not change anything about the programs for Greece, Portugal and Ireland. All the agreed goals will continue to apply and be monitored by the troika. But those countries might also start clamoring for the terms of their deals to be relaxed. The summit’s decision gives the Greek government in particular more ammunition for renegotiating the terms of its bailout, a step that new Greek Prime Minister Antonis Samaras has already said he wants to take."


Monday, May 16, 2011

16/05/2011: Debt Restructuring - two insights

What if, folks... what if default or debt restructuring is the end game?

Here are two sets of thoughts on the topic. The first one is from the Lisbon Council and the second set is adopted (via my edits) from here.

Lisbon Council launched last week Thinking the Unthinkable: Lessons of Past Sovereign Debt Restructurings See , an e-brief by Alessandro Leipold, chief economist of the Lisbon Council and former acting director of the European Department at the International Monetary Fund (IMF). See www.lisboncouncil.net for full details

Mr. Leipold argues that "European debt resolution requires a much more forward-leaning, information-driven approach, involving
  • Supplying markets with better, more timely information (including tougher banking stress tests - I would give credit here to CBofI which did carry out much more rigorous testing of Irish 4 than the EU has ever allowed to take place across the euro area)
  • Abandoning untenable timelines (such as the “no-restructurings-before-2013” mantra), and
  • Staying ahead of the game via recourse to tools such as pre-emptive bond exchange offers
Mr. Leipold draws five key lessons from past sovereign debt restructurings:
  1. Avoid Detrimental Delays. Delays in restructuring are costly (output losses, entail “throwing good money after bad” via increasingly large official bailouts, and ultimately require a larger haircut on private claims). Realistic debt sustainability analyses are needed to detect, and communicate, the possible need for debt restructuring. The EU’s “read-my-lips: no-restructuring-until-2013” sets an arbitrary and non-credible deadline: the sooner it is abandoned, the better.
  2. Repair the Banking Sector. The equation “euro debt crisis = core European bank crisis” needs to be broken. I might add that the equation 'euro debt & banks crises = European taxpayers destruction' must be broken even before we break he debt-banks link. This requires getting tough on bank stress tests, enhancing their rigour and credibility, possibly by associating the Bank of International Settlements (BIS) and IMF with European Union supervisors. Banks tests must be accompanied by much greater pressure from EU supervisors to speed up bank recapitalisation and to close down non-viable entities. Banking resolution legislation should proceed rapidly, as should creation of an EU-wide bank resolution mechanism.
  3. Remove Politics from the Driver’s Seat. The current set-up, including the European Stability Mechanism (ESM), which will begin operations in 2013), "virtually ensures that EU creditor countries’ domestic political interests will play a front-and-centre role. The recent attempted quid pro quo with Ireland whereby Europe would agree to a reduction in the cripplingly high interest rate on its loans in return for changes to the Irish corporate tax code is but one indication of this. Put simply, the decision-making and governance mechanism should be distanced from the high-pitched political positioning characteristic of EU ministerial meetings, thereby also facilitating constructive communication with markets, and helping shape expectations as needed to promote crisis resolution". I can only add to this that politicization of the economic concept of debt restructuring is also evident within the PIIGS themselves. In Ireland, we have now a virtual army of pundits - many well-meaning, of course - arguing against the restructuring on the basis of (1) 'default'=evil, (2) our debts are sustainable, and (3) current path of delaying restructuring until post-2013 is the optimal choice. These are supported, in some instances via lucrative public appointments, by the political elite.
  4. Stay Ahead of the Curve with Preemptive Exchange Offers. "Traditional bond exchange offers, made preemptively, prior to an actual default, worked well in several emerging country debt restructurings over the last decade or so, including Pakistan, Ukraine, Uruguay and the Dominican Republic. Experience indicates that such voluntary restructurings need not, contrary to some claims, be too “soft” for the debtors’ needs. Reasonably priced, and with proper incentives, deals can be concluded rapidly with negligible free riding."
  5. Do Not Expect Too Much from Collective Action Clauses. "Contractual provisions such as collective action and aggregation clauses no doubt help at the margin. But they have not shown themselves to be decisive in debt restructurings. Furthermore, they cannot help in dealing with the current stock of debt".
Much of the above prescriptions/warnings is echoed in the tables summarizing debt restructuring options available to the PIIGS that I have edited based on their original source (here).

Both provide one core lesson to us - any state close to the point of no return when it comes to its debt levels (and no one is denying that we are close to that point, all arguments today are about whether we have crossed it or not) should be:
  1. Prepared to act
  2. Prepared to act preemptively
  3. Be transparent about the problems faced
On all 3 so far our officials are failing miserably, although we are making some progress on the 3rd point...