–Private Creditors Could Face Debt Restructuring If States Insolvent

BRUSSELS (MNI) – Eurozone finance ministers on Sunday agreed the
terms of a new permanent crisis mechanism, the European Stability
Mechanism (ESM), which will replace the temporary European Financial
Stability Facility after it expires in mid-2013.

As had been widely expected, the ESM will allow for restructuring
of debt that would affect private creditors should a sovereign Eurozone
state be declared insolvent.

In such a case, the insolvent state would negotiate a restructuring
plan with private creditors that might include a “standstill” on debt
payments, an extension of maturities, a cut in interest rates or
haircuts on the face value of debt.

Starting in June 2013, all Eurozone government bonds will contain
“collective action clauses” (CACs), which would allow all debt issued by
a country to be lumped together for the purpose of negotiations with
creditors. Creditors could then pass a qualified majority decision,
making the restructuring agreement legally binding.

In addition, all claims of private creditors would be subordinated
to those of the ESM, which will have preferred creditor status.

The ESM would provide liquidity assistance to faltering EMU states
in exchange for rigorous economic and fiscal adjustments.

Below is a verbatim text issued Sunday by Eurozone finance
ministers, outlining the details of the new permanent stability
mechanism:

“Statement by the Eurogroup The recent events have demonstrated
that financial distress in one Member State can rapidly threaten
macro-financial stability of the EU as a whole through various contagion
channels. This is particularly true for the euro area where the
economies, and the financial sectors in particular, are closely
intertwined.

Throughout the current crisis, euro area Member States have
demonstrated their determination to take decisive and coordinated action
to safeguard financial stability in the euro area as a whole, if needed
and return growth to a sustainable path. In particular, the European
Financial Stability Facility (EFSF) has been set up to provide for swift
and effective liquidity assistance, together with the European Financial
Stabilisation Mechanism (EFSM) and the International Monetary Fund, and
on the basis of stringent programmes of economic and fiscal policy
adjustments to be implemented by the affected Member State and ensuring
debt sustainability.

On 28 – 29 October the European Council agreed on the need to set
up a permanent crisis mechanism to safeguard the financial stability of
the euro area as a whole. Eurogroup Ministers agreed that this European
Stability Mechanism (ESM) will be based on the European Financial
Stability Facility capable of providing financial assistance packages to
euro area Member States under strict conditionality functioning
according to the rules of the current EFSF. The ESM will complement the
new framework of reinforced economic governance, aiming at an effective
and rigorous economic surveillance, which will focus on prevention and
will substantially reduce the probability of a crisis arising in the
future.

Rules will be adapted to provide for a case by case participation
of private sector creditors, fully consistent with IMF policies. In all
cases, in order to protect taxpayers’ money, and to send a clear signal
to private creditors that their claims are subordinated to those of the
official sector, an ESM loan will enjoy preferred creditor status,
junior only to the IMF loan.

Assistance provided to a euro area Member State will be based on a
stringent programme of economic and fiscal adjustment and on a rigorous
debt sustainability analysis conducted by the European Commission and
the IMF, in liaison with the ECB. On this basis, the Eurogroup Ministers
will take a unanimous decision on providing assistance.

For countries considered solvent, on the basis of the debt
sustainability analysis conducted by the Commission and the IMF, in
liaison with the ECB, the private sector creditors would be encouraged
to maintain their exposure according to international rules and fully in
line with the IMF practices. In the unexpected event that a country
would appear to be insolvent, the Member State has to negotiate a
comprehensive restructuring plan with its private sector creditors, in
line with IMF practices with a view to restoring debt sustainability. If
debt sustainability can be reached through these measures, the ESM may
provide liquidity assistance.

In order to facilitate this process, standardized and identical
collective action clauses (CACs) will be included, in such a way as to
preserve market liquidity, in the terms and conditions of all new euro
area government bonds starting in June 2013. Those CACs would be
consistent with those common under UK and US law after the G10 report on
CACs, including aggregation clauses allowing all debt securities issued
by a Member State to be considered together in negotiations. This would
enable the creditors to pass a qualified majority decision agreeing a
legally binding change to the terms of payment (standstill, extension of
the maturity, interest-rate cut and/or haircut) in the event that the
debtor is unable to pay.

Member States will strive to lengthen the maturities of their new
bond emissions in the medium-term to avoid refinancing peaks. The
overall effectiveness of this framework will be evaluated in 2016 by the
Commission, in liaison with the ECB. We restate that any private sector
involvement based on these terms and conditions would not be effective
before mid-2013. President of the European Council Herman Van Rompuy has
indicated that his proposal on limited Treaty change to the European
Council at its next meeting will reflect today’s decision.”

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