Corvinus
Corvinus

Debt Restructuring in the Euro Area: a Necessary but Manageable Evil?

Darvas, Zsolt (2011) Debt Restructuring in the Euro Area: a Necessary but Manageable Evil? Working Paper. Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest, Budapest.

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Official URL: http://web.uni-corvinus.hu/matkg/

This paper was originally prepared as a briefing paper for the European Parliament's Economic and Monetary Affairs Committee ahead of the Monetary Dialogue with European Central Bank president Jean-Claude Trichet on 20 June 2011, on the subject of Debt restructuring – ramifications for the euro area.

Abstract

There are two possible responses to the Greek debt crisis: ‘Plan A’, continued official lending, for as long as needed, with possible voluntary private sector involvement, and ‘Plan B’, coercive preemptive or post-default restructuring with significant face value reduction in privately-held debt. Both options have risks, but it is necessary to move to Plan B sooner or later. The impact on Greece could be mitigated by foreign bank ownership and proper liquidity support measures. The direct spillover impact on the rest of the euro area seems small. But there is the risk of contagion, which is a serious concern. There is a cautious case for delaying somewhat Plan B in order to prepare for it.

Item Type:Monograph (Working Paper)
Series Name:Working Papers, 2011/2
Uncontrolled Keywords:debt restructuring, euro-area crisis, fiscal sustainability, financial interdependence, Lehman Brothers, JEL codes: F34, E60, H63
Subjects:Economic policy
Finance
International economics
ID Code:536
Deposited By: Ádám Hoffmann
Deposited On:28 Feb 2012 14:28
Last Modified:03 Jul 2012 01:27

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