Six thought leaders in sovereign debt restructuring share their observations of the current situation and provide guidance on the complex challenges ahead
A crisis far beyond anything experienced in recent memory
The way in which regulators, investors, banks and governments respond to the current sovereign debt challenges will echo for many years. Decisions made today will, for better or worse, continue to have consequences far beyond our current time horizon. Getting it right will not be easy.
EU 27 public debt as a % of 2009 GDP Source: Eurostat
As the experts outline in the following pages, there is no doubt that the world financial system has some very real issues to resolve: how to manage the unprecedented levels of sovereign debt to the satisfaction of those concerned, and how to design a system of arbitration, testing and resolution that will prove robust enough for even the thorniest dispute.
Greek restructuring in February 2012 Source: IMF, April 2013
To achieve this, there must be recognition of some truths: First, holdouts — bondholders who withhold their consent and retain their right to seek the full payment of original bonds — are not the primary problem in the sovereign debt debate. Certainly they can slow down the refinancing process, but to focus on holdouts would be to miss the central elements of concern.
growth in EU 28 sovereign debt 2009 – 2013 Source: Eurostat
Second, despite the work already done, the eurozone remains in very serious trouble. Governments have made commendable efforts to tackle the systemic fiscal and political weaknesses, but that work has only just begun. Much more remains.
Governments and central banks cannot do all that work themselves. For their proposals and efforts to have a genuine impact, markets and investors must also reconsider their response to government and supervisory action, and to engage in the debate in a mature, constructive way, otherwise they could find their right to participate in future restructurings may be diluted.
The good faith of all concerned is critical. As all our observers note, the new normal is anything but. The world economy is now experiencing levels of volatility unseen for decades. Markets are concerned by the uncertainty created by the policy vacuum in Brussels and other national capitals.
In that atmosphere, then, what is the likelihood of a coherent strategy emerging? Without a doubt, achieving lasting reform is made more difficult by different interested parties, and we are concerned by some of the more outlandish and extreme commentary coming from certain quarters.
Of course, those concerns are in some ways allayed by the knowledge that some of the world’s best minds are hard at work designing solutions to these problems. However, to succeed, those engaged in the effort must combine pragmatism with intellectual rigour, and realism with principle. This is a crisis far beyond anything experienced in recent memory. Solving it will not be easy.
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