Why Reinvent the Wheel?: Restructuring Italy's Debt Using the Euro-CAC and Maturity Extension

Abstract

The European Stability Mechanism (ESM) Treaty requires that all bonds issued in the euro area after January 1, 2013, with maturity greater than one year include a standardized collective action clause (“Euro CAC”). Italy implemented the Euro CAC through a legislative decree. In the event of an Italian debt crisis when the country cannot borrow at acceptable rates to meet its financing needs, we recommend that the ESM use the Euro CAC included in Italy’s post-2013 bonds to restructure them. Even after excluding debt held by the European Central Bank (ECB) and accounting for potential changes in creditor composition after a restructuring announcement, Italy can still persuade enough creditors to participate in a CAC operation to restore its debt sustainability. At the same time, Italy will impose a maturity extension on debt held by non-participating creditors, which it is legally authorized to do. In other words, this plan gives creditors two options: getting paid less but on time under mutually agreed terms (by participating in a CAC restructuring), or getting paid later (under a maturity extension, which may precede a subsequent restructuring anyway). Compared to alternatives, this plan reduces holdout incentive, minimizes litigation risks, and can be implemented quickly.