Private sector risk to grow under new EU mechanism

BRUSSELS (BestGrowthStock) – Private sector involvement in the resolution of future euro zone debt crises would increase depending on the extent of the crisis, according to a European Commission proposal backed by France and Germany presented to EU finance ministers on Sunday.

The proposal, backed by the European Central Bank president, the European Commission and the chairman of the Eurogroup, differentiates between liquidity and solvency crises in the 16 countries that share the single currency.

In the case of a liquidity crisis, private sector bondholders would only be expected to maintain their exposure to the government in trouble, said a senior EU source with knowledge of the details of the proposed mechanism.

If the liquidity crisis turns into a solvency crisis, however, private investors could be asked for a moratorium on debt repayment, a delay in interest payments or to accept writedowns on the value of interest or even the principal owed to them by the government.

The mechanism, which would kick in from 2013, would also envisage that all bonds issued in the euro zone would carry collective action clauses from 2013, allowing a majority of bond holders to override objections from minority holders in seeking an agreement on a debt restructuring.

“The idea of this system of two types of crisis is that if you address correctly the liquidity crisis usually you don’t have to tackle the solvency crisis,” the senior EU source said.

(Reporting by Julien Toyer, writing by Jan Strupczewski)

Private sector risk to grow under new EU mechanism