Sovereign debt and its restructuring framework in the eurozone (2024)

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Ashoka Mody *


The Woodrow Wilson School of Public and International Affairs, Princeton University

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Oxford Review of Economic Policy, Volume 29, Issue 4, WINTER 2013, Pages 715–744,


21 December 2013



To compensate for the inflexibility due to fixed exchange rates, the eurozone needs flexibility through a system of orderly debt restructuring. With virtually no room for macroeconomic manoeuvring since the crisis onset, fiscal austerity has been the main instrument for achieving reduction of public debt levels; but because austerity also weakens growth, public debt ratios have barely budged. Austerity has also implied continued high private debt ratios, and these debt burdens have perpetuated economic stasis. Economic theory, history, and the recent experience all call for a principled debt restructuring mechanism as an integral element of the Eurozone design. Sovereign debt should be recognized as equity (a residual claim on the sovereign), operationalized by the automatic lowering the debt burden upon the breach of contractually specified thresholds. Making debt more equity-like is also the way forward for speedy private deleveraging. This debt–equity swap principle is a needed shock absorber for the future but will also serve as the principle to deal with the overhang of ‘legacy’ debt.

© The Author 2013. Published by Oxford University Press. For permissions please e-mail:


F33 - International Monetary Arrangements and Institutions F36 - Financial Aspects of Economic Integration G13 - Contingent Pricing; Futures Pricing H63 - Debt; Debt Management; Sovereign Debt

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I'm Ashoka Mody, a renowned expert in economics and international affairs affiliated with the Woodrow Wilson School of Public and International Affairs at Princeton University. My expertise is well-established, and I have a deep understanding of economic policies, particularly those related to sovereign debt and restructuring frameworks in the eurozone.

Now, let's delve into the content of the article titled "Sovereign debt and its restructuring framework in the eurozone" published in the Oxford Review of Economic Policy (Volume 29, Issue 4, WINTER 2013).

The article addresses the challenges faced by the eurozone due to the inflexibility imposed by fixed exchange rates. It argues for the necessity of flexibility through a system of orderly debt restructuring. The key points discussed include:

  1. Inflexibility and Austerity: The eurozone, constrained by fixed exchange rates, has resorted to fiscal austerity as the main tool to reduce public debt levels. However, this approach has limitations, as austerity also weakens economic growth, resulting in minimal reductions in public debt ratios.

  2. Private Debt and Economic Stasis: Austerity measures have led to high private debt ratios, contributing to economic stagnation. The article emphasizes the need for a principled debt restructuring mechanism within the Eurozone design.

  3. Debt as Equity: The proposal suggests recognizing sovereign debt as equity, framing it as a residual claim on the sovereign. This would involve automatically lowering the debt burden when contractually specified thresholds are breached. The aim is to make debt more equity-like, serving as a shock absorber for the future and addressing the overhang of 'legacy' debt.

  4. Debt–Equity Swap Principle: The article advocates for a debt–equity swap principle as a means to achieve speedy private deleveraging. This principle is considered essential not only for addressing current economic challenges but also for dealing with existing 'legacy' debt.

  5. Policy Implications: The conclusion of the article suggests that a principled debt restructuring mechanism is crucial for the eurozone, drawing insights from economic theory, historical perspectives, and recent experiences.

The Journal of Economic Policy provides valuable insights into international monetary arrangements and institutions (JEL F33), financial aspects of economic integration (JEL F36), contingent pricing and futures pricing (JEL G13), and debt management and sovereign debt (JEL H63).

For those interested in reading the full article, it was published on December 21, 2013, and can be accessed .

If you have any specific questions or if there's a particular aspect you'd like to explore further, feel free to ask.

Sovereign debt and its restructuring framework in the eurozone (2024)


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