The Euro Area needs an orderly public debt restructuring mechanism, argue Managing Director Vesa Vihriälä and Professor Beatrice Weder di Mauro in a column published on the VoxEU portal. Making market discipline credible through an orderly debt restructuring mechanism is a promising alternative to contain moral hazard associated with mutualisation of public debt, which has been proposed as an attractive way to overcome the debt overhang, a drag and risk on growth in Europe.
By combining such a mechanism with a strictly regulated temporary mutualisation scheme or perhaps even a well-designed debt conversion scheme, one might both reduce the current debt overhang in an orderly fashion and cement strong incentives against over-borrowing in the future. Without a debt restructuring mechanism, the proposed ideas to ease the burden of consolidation would be far too risky, the authors think.
Read the column on the VoxEU portal.