Euro Area Paves the Way for Easier Sovereign Debt Restructurings

(Bloomberg) -- A proposal to simplify euro-area sovereign debt restructurings has gained broad support among members of the common currency, Portuguese Finance Minister Mario Centeno said, as governments move to bolster its tools after the last credit crisis nearly tore the 19-nation bloc apart.

The plan envisages strengthening collective action clauses, which have been mandatory for sovereign bonds issued by euro-area states since 2013. The change would make it more difficult for small groups of creditors to block restructurings, easing efforts to mitigate the effects of a crisis and stabilize markets.

While there is no support “for introducing any automaticity or mechanic approaches” in sovereign write-offs, the currency bloc is looking “at ways to make it more efficient, should there ever be the need to have a debt restructuring,” Centeno said after a meeting with his counterparts in Brussels.

Rules currently in place allow repayment modifications on sovereign debt if the terms are approved by two sets of majorities: Holders of all the affected bonds voting together must approve changes, as must holders of each bond series separately. Replacing this cumbersome “two-limb” voting procedure with a single-limb aggregation clause requiring a single vote by holders of the affected bonds would make it harder for holdouts to resist debt restructuring attempts when the majority of investors concedes that it’s necessary.