The ghost of Deauville
Ashoka Mody 07 January 2014
On 19 October 2010, Angela Merkel and Nicolas Sarkozy agreed that in future, sovereign bailouts from the European Stability Mechanism would require that losses be imposed on private creditors. This agreement was blamed for the increase in sovereign spreads in late 2010 and early 2011. This column discusses recent research on the market reaction to the surprise announcement at Deauville. With the exception of Greece, the rise in spreads was within the range of variability established in the previous 20 days.
The aversion to debt restructuring in the Eurozone has been remarkable, even though public debt ratios in several countries are well above the IMF-identified critical debt overhang threshold of 100% of GDP (IMF 2012). By early 2010, some recognised the urgency of restructuring Greek public debt (Calomiris 2010). But the official position between late 2009 and early 2011 deemed even Greek debt to be sustainable. Beyond the particularities of Greece, general principles were invoked. In the words of Cottarelli et al.
Financial markets International finance
eurozone, sovereign debt, Eurozone crisis, sovereign debt restructuring, financial contagion, Deauville