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Debt levels in the eurozone have reached new record highs. The member countries have tried to cushion the economic consequences of the corona pandemic with a massive increase in government spending. End of 2021 public debt in relation to GDP will approach 100% on average. There are various calls to abolish or soften the Maastricht rules of limiting sovereign debt. We see the risk of a new sovereign debt crisis in this decade if it is not possible to bring public debt down to an acceptable level. Our new fiscal rule would be suitable and appropriate for this purpose, because obviously the Maastricht criteria have failed. In contrast to the rigid 3% Maastricht-criterion, our rule is flexible and it addresses the main problem: excessively high public debt ratios. And it lowers the existing incentives for highly indebted governments to exert expansionary pressure on monetary policy. If obeyed strictly, our rule reinforces the snowball effect and reduces the excessively high debt ratios within a manageable period, even if nominal growth is weak. This is confirmed by simulations with different scenarios as well as with the hypothetical application of the new fiscal rule to eurozone economies from 2022 to 2026. Finally, we take up the recent proposal by ESM economists to increase the permissible debt ratio from 60 to 100% of GDP in the eurozone.
The expansion of actors and instruments in sovereign debt markets through bond financing generated a coordination problem among bondholders during the debt restructuring process. There is a risk that an individual bondholder will be passive or act against the restructuring slowing down or even precluding the process of restructuring even though it is in the general interest of bondholders as a group, not to mention the population of the country experiencing the shortage of funds for public welfare. In particular, the disruptions to sovereign debt restructuring by frivolous litigation is considered as one of the main threats.
This dissertation is the first major study devoted to sovereign bonds structured through a trust arrangement and the promising features that such a legal structure possesses for an effective and efficient sovereign debt restructuring. It provides a comprehensive inquiry into the evolution of the mechanisms to coordinate creditors, with a focus on bondholders and institutional frameworks which facilitated this coordination. It examines intriguing primary sources from League of Nations archives and provides in-depth case studies on the functionality of the trustees in sovereign bond restructurings performed by Argentina in 2016 and Ecuador in 2008.
Assessing the utility of trust arrangements to address coordination problems, this thesis is driven by the puzzle: How to better balance (i) the need for smooth sovereign debt restructurings, which by definition entails some losses for creditors, with (ii) bondholders’ legitimate interests? What approach can be used in constructing a legal and institutional framework for trustees to promote the best interest of the bondholders in sovereign debt restructuring? As a solution, it seems that incentives for bond trustees to pursue debt sustainability will achieve both goals.
In this regard, recognition of the concept of debt sustainability, being in substance the IMF and WB debt sustainability assessment, as the best interest of bondholders in sovereign debt restructuring is beneficial from multiple aspects. It enables a bond trustee to excel in its role as a guardian of bondholders by following the best interest of bondholders in exercising its discretion. Moreover, it fosters an equilibrium between the interests of private creditors and a state taking into account its socio-political aspects.