The 'haircut' of public creditors under EU law

Abstract

While the Court of Justice of the European Union has approved the European financial assistance schemes, the haircut of public creditors appears as a possible next step of escalation in the euro debt crisis. This article explores the legal boundaries set by the EU Treaty on such debt restructuring. Both the no-bailout clause and the prohibition of monetary state financing are at the core of the analysis. In its rulings in Pringle and Gauweiler, the Court specified the meaning of these provisions in relation to the conditions governing financial assistance programs. The analysis highlights the limitations set by these norms on the scope of potential modes of haircuts on public creditors. We find that a haircut on nominal debt would infringe the no-bailout clause and the involvement of the ECB would violate the ban on monetary state financing. However, there remain other forms of "soft haircuts", such as the lowering of interest rates and the extension of terms, which may be compatible with EU law.

The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.