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.

Broad Support

“The discussion on the single limbs was one that got broad support,” said Centeno, who chairs meetings of the currency area’s finance ministers. The Eurogroup president also told reporters in Brussels on Monday that the bloc supports a proposal this year by France and Germany to strengthen the role of the eurozone’s bailout fund in debt restructuring negotiations.

The Franco-German proposal calls for the European Stability Mechanism to “facilitate” dialogue between member states and private investors, when changes to repayment terms are sought. While this provision is similar to what the International Monetary Fund currently does for countries seeking assistance, the ESM will have a tighter grip on the process because its lending power in euro-area bailouts is a multiple of the IMF’s capacity.

While simpler rules for debt write-offs could raise concerns among investors amid a turmoil in Italian and Greek sovereign markets, euro-area governments resisted more radical proposals for automatic upfront debt restructuring for euro-area states seeking ESM loans. That plan, if adopted, would risk causing panic and a run on the bonds among investors at the first sign of trouble.

By facilitating the process while stopping short of making it automatic, the compromise could address concerns of Northern European voters, while not scaring off investors when troubled countries contemplate seeking a bailout.

To contact the reporters on this story: Nikos Chrysoloras in Brussels at nchrysoloras@bloomberg.net;Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net

To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.net, ;Ben Sills at bsills@bloomberg.net, Richard Bravo, Tony Czuczka

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