A comprehensive approach to the euro-area debt crisis

The euro area‘s sovereign debt crisis continues though significant steps have been taken to resolve it. This paper proposes a comprehensive solution to the crisis based on three pillars: a plan to restore banking sector soundness in the whole euro area, a resolution of sovereign debt crisis -including a revision of EU assistance facilities and a reduction of the Greek public debt- and a strategy to foster growth and competitiveness. The paper provides novel estimates and analysis focusing on the current situation of Greece, Ireland, Portugal and Spain.

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

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.