France’s finance minister has hit out at German-backed plans to impose debt writedowns on investors in bailed out countries, warning that the issue was a “red line” for Paris in talks on eurozone reform.
Bruno Le Maire told a Politico conference in the French capital on Thursday that France was opposed to any “automatic” mechanism that would force private sector holders of sovereign debt to take losses when a eurozone country applies for a bailout.
He said the step would make the euro area more vulnerable and fuel Eurosceptic populism. “I believe in policies and democracies and responsibility of elected governments. I can guarantee you, you would be handing a gift to extremists,” he said.
The broadside from Paris comes after Angela Merkel struck a coalition deal with the centre-left SPD to pave the way for her fourth term as German chancellor. Emmanuel Macron, French president, is pushing for a pact with Berlin on reinforcing the stability of the single currency, paving the way for a grand bargain between all eurozone governments.
While a plan to have an automatic debt restructuring mechanism is not included in the German coalition deal, it has long been touted by Berlin as a building block of a reinforced eurozone.
The Germany finance ministry argued in a paper last year that it would force investors to be more careful when buying up eurozone sovereign debt, increasing market discipline on member states and reducing the size of taxpayer-funded bailouts.
The idea is strongly backed by the Dutch government. Greece is the only eurozone country so far to go through a sovereign debt restructuring, with private investors accepting a haircut of more than 50 per cent on the face value of the bonds they held in 2012.
Opponents of the measures, who include many eurozone finance ministers, argue automatic write-downs such as maturity extensions would create a self-fulfilling cycle of crises and spark investor panic. Analysts warn that Italy, which has the highest debt-to-GDP ratio of any eurozone country outside Greece, would be most vulnerable to market pressures should debt restructuring become part of the eurozone’s bailout playbook.
“We all know that we need something to prevent unsustainable debt stocks moving from private balance sheets to the ESM before they get restructured,” said Lucas Guttenberg at the Delors Institute in Berlin. “The big question is how to get there without causing a market panic.”
While the idea is divisive, compromise proposals under consideration include handing greater powers to the European Stability Mechanism, the currency bloc’s bailout fund, to take debt restructuring decisions, and steps to reform bondholders’ rights to prevent small groups of investors from resisting losses that have been accepted by the majority.
Klaus Regling, head of the ESM, has said that, if a deal is reached on a sovereign debt restructuring framework, the ESM “could provide the debt sustainability analysis, and help organising negotiations between creditors and the debtor”.
Germany’s central bank has touted a plan where any country asking for a bailout must have an automatic three-year maturity extension on its bonds to avoid using programme funds to pay off its debt servicing costs. This idea has been rejected by Mr Regling. Analysts warn it could lead investors to dump a troubled country’s bonds before it asked for a bailout as they will fear not being paid back on time.