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William Rhodes, advisor to Citigroup chief executive Vikram Pandit and recently retired former board member of the Institute of International Finance, says the European Union should be wary of trying to resurrect a sovereign debt restructuring mechanism (SDRM) in the midst of a still unfolding crisis because it would have such a destabilising effect on the sovereign capital markets. Rhodes quotes the case of Ireland, where 10-year bond yields rose more than 200 basis points within the space of two weeks after German policymakers began talking up such an approach, forcing the government to accept a bailout from the EU and the IMF. The idea of a SDRM was first proposed in 2001 by Anne Krueger, then first deputy managing director at the IMF, to give international legal protection for bankrupt sovereigns. It was never implemented, but recent comments from German Chancellor Angela Merkel about bailing in senior bondholders of sovereign debt have spooked markets that the idea may be revived.
“The EU should move very carefully in trying to impose or resurrect something similar to the SDRM for the very reasons that just have occurred in Ireland and may occur in other countries,” says Rhodes.