Single-Limb Solution: Restructuring Italian Debt

Italy faces an increasingly unsustainable debt load, now totalling more than €2.4 trillion and representing more than 130% of Italian GDP. The country’s economic indicators do not suggest it will grow its way out of the predicament, and thus immediate and substantial debt relief has become necessary. Other proposals predicated on extending maturities will not help Italy nor its bondholders because they are based on the false presumption that Italy’s economy is about to jump-start. Proposals based on this assumption will be unsuccessful because giving Italy more time will only end with Italy accumulating more debt. This proposal outlines a plan to restructure about a quarter of Italy’s total debt stock, for an amount of roughly €500 billion. To accomplish this, we suggest that Italy, pursuant to its power under the Public Debt Consolidated Act, unilaterally retrofit an aggregated, single-limb collective action clause (“CAC”) to government bonds that were issued prior to 2013, under Italian law, and with a maturity date greater than one year. European Central Bank (“ECB”)-held bonds also would be exempted. Restructuring the debt incrementally in this fashion would achieve the following: 1) immediate and substantial debt relief, as even 25% of Italy’s debt would more than easily double the size of the Greek restructuring, while providing a legally sound and streamlined model Italy could employ should further restructuring be required; 2) the power to functionally eliminate blocking positions for potential holdouts, while still giving affected bondholders the power to “fight” a restructuring by negotiating prior to the vote; and 3) reduced legal risk by using an internationally recognized International Capital Market Association (“ICMA”)-style single limb CAC to restructure the pre-2013 bonds, while also avoiding the legal uncertainty attendant with any restructuring of the post-2013 bonds containing EuroCACs.