The Evolution of Euro Area Sovereign Debt Contract Terms: A Preliminary Examination

The euro area sovereign debt crisis is over three years old and reforms are being instituted in an attempt to correct some of the problems that caused the crisis. This article investigates a key assumption that underlies one of the major policy reforms that has been put in place as a result of the crisis: the mandate that all euro area sovereign bonds, starting on January 1, 2013, begin using a set of contract terms aimed at solving collective action problems (CACs) among bondholders.

That reform is supposed to make bail-outs less likely and to make private sector involvement (PSI) in future restructurings more likely. The hope is that the reform will discourage the weaker members of the Eurozone from over-borrowing on the expectation of a bail-out.