The Greek ‘odyssey’ is the latest proof that the solution to the debt crises of the euro zone’s member countries cannot be left to negotiations between heads of state in nations where different political agendas, mentalities and various issues—even worthy of consideration—clash, and do not have much to do with solving the problem in question.
Despite the progress made, for instance, when it comes to the creation of the European stability mechanism, the so-called “state-saving fund,” it would be appropriate for those in Europe to look beyond the Atlantic Ocean for a few lessons on state debt management. From 1937 on, the United States has regulated the financial crises of its states, or “sub-sovereign” entities, as well as municipalities of various sizes, with the chapter 9 bankruptcy code.
The conditions to benefit from the consequent procedures are: 1. Being a sub-sovereign entity (from a monetary and financial point of view, countries in the euro zone, de facto, are forming, according to the American logic, “a larger sovereign organization.”); 2. Being in a situation close to bankruptcy; 3. Negotiating in good faith with creditors and reaching an agreement with the majority thereof; 4. Committing to implement an adjustment program in order to honor the debt.
The experience in the United States is generally positive: since it was introduced, almost 700 entities have benefitted from chapter 9, managing in 90 percent of cases, to avert bankruptcy.
In this sense, the norm shows some important features: it preserves the power of the initiative of the sub-sovereign entity under stress while formulating an adjustment program granting ownership and feasibility in its subsequent implementation. Once validated by the judicial, it bounds non-cooperating creditors to conform to the plan, (in the restructuring of the Greek debt, instead, the non cooperating creditors of the titles issued in London were fully repaid).
It creates, for the sub-sovereign debtor and its creditors, a “locus super partes” (a neutral place) to discuss and hopefully reach a cooperative solution; it provides stakeholders, as well as the labor unions, with the right of being consulted about the restructuring plans (normally completely excluded from negotiations); finally it allows the debtor to activate the procedures in the initial phases of the financial stress so as to contain the consequences of the debacle in the interest of citizens and creditors and avert the economic and social disaster of bankruptcy.
As an additional confirmation of its usefulness, the Obama administration and Congress are thinking of extending the application of chapter 9 to Puerto Rico, which having an ambiguous judicial nature (it is territory but not a municipality), has invoked the application of the chapter in question to face the serious financial crisis that hit it.
We believe that the principles inspiring chapter 9 legislation could be usefully applied to the management of the debt crises in the euro zone (starting with Greece) to contain the meta-financial issues that guided the negotiations generating adverse political consequences—similar to those that brought Syriza to power in Greece and that, in the near future, can push the electoral success of political party Podemos in Spain, Marine Le Pen in France and The North League and Five Star movement in Italy.
The first step to take is acknowledging the fact that member countries in the euro zone are part of a Union that is sovereign, in line with the intentions of the proponents of the euro and the proposal reiterated just the other day by French President François Hollande.
In fact, the political involvement is already underway when the debt of a member enters a crisis due to imprudent policies or assessment of the international financial market, determining the loss of fiscal sovereignty of the country in question. The euro zone is the sovereign entity and the member states are the sub-sovereign ones, just like the municipalities in the United States. From a procedural point of view, we should identify a mediator—a high level personality to whom to hand the task of leading the process and, in so doing, taking it away from the national politics of European countries.
From a procedural point of view, we should identify a mediator—a high level personality to whom to hand the task of leading the process and, in so doing, taking it away from the national politics of European countries.
Thanks to this legislation, the United States has managed to face hundreds of cases of financial demise and insolvency produced by the financial crisis of 2008, containing their devastating consequences and preventing a possible domino effects on other sovereign and sub-sovereign entities in the federation.
This is exactly what Europe did not manage to avoid. Our hope is that, finally, minds in Europe will open up and adopt the principles of such legislation.