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Ashoka Mody * * The Woodrow Wilson School of Public and International Affairs, Princeton University , e-mail: amody@Princeton.edu Search for other works by this author on: Oxford Academic
Oxford Review of Economic Policy, Volume 29, Issue 4, WINTER 2013, Pages 715–744, https://doi.org/10.1093/oxrep/grt029
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21 December 2013
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Ashoka Mody, Sovereign debt and its restructuring framework in the eurozone, Oxford Review of Economic Policy, Volume 29, Issue 4, WINTER 2013, Pages 715–744, https://doi.org/10.1093/oxrep/grt029
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Abstract
To compensate for the inflexibility due to fixed exchange rates, the eurozone needs flexibility through a system of orderly debt restructuring. With virtually no room for macroeconomic manoeuvring since the crisis onset, fiscal austerity has been the main instrument for achieving reduction of public debt levels; but because austerity also weakens growth, public debt ratios have barely budged. Austerity has also implied continued high private debt ratios, and these debt burdens have perpetuated economic stasis. Economic theory, history, and the recent experience all call for a principled debt restructuring mechanism as an integral element of the Eurozone design. Sovereign debt should be recognized as equity (a residual claim on the sovereign), operationalized by the automatic lowering the debt burden upon the breach of contractually specified thresholds. Making debt more equity-like is also the way forward for speedy private deleveraging. This debt–equity swap principle is a needed shock absorber for the future but will also serve as the principle to deal with the overhang of ‘legacy’ debt.
© The Author 2013. Published by Oxford University Press. For permissions please e-mail: journals.permissions@oup.com
JEL
F33 - International Monetary Arrangements and Institutions F36 - Financial Aspects of Economic Integration G13 - Contingent Pricing; Futures Pricing H63 - Debt; Debt Management; Sovereign Debt
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As an expert in economics and international finance, I have a thorough understanding of various economic policies, financial instruments, and their implications on global economic systems. My expertise extends to analyzing scholarly articles, such as the one referenced, with a critical eye towards understanding the complexities of economic frameworks and their real-world applications.
The article "Sovereign debt and its restructuring framework in the eurozone," authored by Ashoka Mody and published in the Oxford Review of Economic Policy (Volume 29, Issue 4, WINTER 2013), delves into the intricacies of sovereign debt restructuring within the context of the eurozone. Mody, affiliated with The Woodrow Wilson School of Public and International Affairs at Princeton University, presents a compelling argument regarding the need for a structured framework to manage sovereign debt crises effectively.
Here's a breakdown of the key concepts addressed in the article:
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Sovereign Debt Restructuring: The article discusses the necessity for a well-defined mechanism to address sovereign debt crises, particularly within the eurozone. Mody highlights the challenges posed by fixed exchange rates and advocates for flexibility through orderly debt restructuring.
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Macroeconomic Policy Instruments: Mody emphasizes the limitations of macroeconomic policy tools within the eurozone, especially in the aftermath of the financial crisis. Fiscal austerity, implemented to reduce public debt levels, is examined as a primary strategy, albeit with limited success due to its adverse impact on economic growth.
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Debt-Equity Swap Principle: The article proposes a novel approach wherein sovereign debt is likened to equity, suggesting automatic adjustments in debt burdens upon breaching predefined thresholds. This concept aims to make debt more equity-like, facilitating private deleveraging and providing a mechanism to address the overhang of 'legacy' debt.
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Economic Theory and Historical Perspectives: Mody draws insights from economic theory and historical experiences to underscore the importance of a principled debt restructuring mechanism within the eurozone. He argues that such a framework is crucial for restoring economic stability and fostering growth in the region.
In summary, Mody's article contributes significantly to the discourse surrounding sovereign debt management and economic stability in the eurozone. By examining the theoretical foundations, historical precedents, and contemporary challenges, the author advocates for a comprehensive restructuring framework to address the complexities of sovereign debt dynamics effectively.
