The Problem of Holdout Creditors in Eurozone Sovereign Debt Restructuring

The Eurozone official sector has declared that the belated restructuring of Greek bonds held by private sector creditors in 2012 was a “unique and exceptional” event, never, ever to be repeated in any other Eurozone country. Maybe so. But if this assurance proves in time to be as fragile as the official sector’s prior pronouncements on the subject of “private sector involvement” in Eurozone sovereign debt problems, any future Eurozone debt restructuring will be surely plagued by the problem of non-participating creditors --- holdouts. Indeed, it is the undisguised fear of holdouts and the prospect of a messy, Argentine-style debt restructuring in the belly of Europe that has been one of the principal motivations for the official sector’s willingness to use its taxpayer money to repay, in full and on time, all of the private sector creditors of Eurozone countries receiving bailouts (the belated Greek restructuring being the sole exception). This article argues that a simple amendment of the Treaty Establishing the European Stability Mechanism (the Eurozone’s new bailout facility) could immunize within the confines of the Eurozone the assets of a Eurozone country receiving ESM bailout assistance from attachment by litigious holdout creditors. By thus increasing the difficulties that holdouts would face in enforcing court judgments against a debtor country, the objective of the amendment is to deflate creditor expectations that staying out of an ESM-supported sovereign debt restructuring will lead to a preferential recovery for the holdouts. This measure would also, when taken together with the other steps that the Eurozone has already implemented, substantially replicate the important features of the Sovereign Debt Restructuring Mechanism proposed by the IMF in 2002