State Bankruptcies, Debt Restructuring or Continued Financial Support: How High are the Costs of these Alternatives and What can they Hope to Achieve?

Should Greece remain within the euro area or leave it, and which is the most appropriate path for heavily indebted countries to take: declare a state bankruptcy, restructure their debt or bridge the crisis with bailout funds? According to Jürgen Matthes, Cologne Institute for Economic Research, debt restructuring can be regulated for states even without an international bankruptcy procedure, and completed with the participation of a greater number of creditors. Collective Action Clauses may play a key role in this procedure, which is why their introduction in the Eurozone should be endorsed. Bodo Herzog, ESB Business School, Hochschule Reutlingen, dismisses public financial support to bridge the crisis as a solution. The only remaining solution is that of debt restructuring or state bankruptcy. Holger Schmieding, Berenberg Bank, London, argues that it is far more advantageous and less risky for donor countries to continue to support all of the periphery countries that conform to the conditions governing access to funding. This is one way of keeping these countries on track to complete the reforms that are needed to boost their growth potential, enabling them to sustainably shoulder their own debts again. Moreover, Europe will otherwise run the risk of an escalating economic and political crisis, which could also shake Germany’s foundations. According to Mathias Erlei, Technical University of Clausthal-Zellerfeld, state bankruptcies and continued financial support are not acceptable strategies for overcoming a debt crisis. The most promising strategy would be to sufficiently disburden the indebted state on order to subsequently cap mutual economic hedging. States opting for restructuring would then have to act completely independently and could no longer hope for any show of solidarity from other states in the form of financial support.