PADRE: Politically Acceptable Debt Restructuring in the Eurozone

Pierre Pâris, Charles Wyplosz 28 January 2014



Executive Summary

1 Introduction


2 Economic Rationale for Debt Restructuring

2.1 Growth and the debt burden
2.2 Sensitivity to shocks
2.3 Financial market instability
2.4 The special case of the Eurozone
2.5 Low debts are required in a monetary union

3 Political-Economic Principles

3.1 Governance
3.2 No redistribution

4 Policy Options

4.1 The PADRE proposal made simple
4.2 Application to the Eurozone: Key elements
4.3 The base case
4.4 The plan without the ECB

5 Variants

5.1 Smaller restructuring
5.2 Transfers across countries
5.3 The opt-out clause
5.4 Recouping savings from lower interest rates
5.5 Lower interest rate through financial repression?

6 Caveats

6.1 Bond acquisition price
6.2 The aftermath of debt restructuring
6.3 Moral hazard
6.4 Treatment of the new balance sheet items
6.5 The size of the ECB

7 Conclusions

Appendix 1: Adjusted shares of ECB capital
Appendix 2: The arithmetic of seigniorage income

CEO and Founding partner, Banque Pâris Bertrand Sturdza

Professor of International Economics, Graduate Institute, Geneva; Director, International Centre for Money and Banking Studies; CEPR Research Fellow