06 Dec 2010

The Seniority Conundrum: Bail out countries but bail in private, short-term creditors?

Daniel Gros

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Despite its large size relative to the small Irish economy, the bailout announced by the Eurogroup following its meeting of 28 November 2010 is not working, as evidenced by the continuing rise in risk premiums. CEPS Director Daniel Gros argues in this commentary that part of the problem lies in a seemingly innocuous provision in the proposed permanent successor to the current European Financial Stability Facility in 2013. The argument is tricky, but at the heart of the problem lies the insistence that rescue financing is senior to private debt while simultaneously ruling out rescheduling of short-term debt.

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