25.4.11

Value recovery

President of the European Central Bank, Jean Claude Trichet, was once head of the Paris Club – the group of government creditors who negotiated debt restructuring during the Latin American debt crisis of the 1980s. This column asks how such experience will help Europe now that the problems are on its doorstep. It introduces a Trichet Plan for the Eurozone.

In April 1989, Mexico’s external debt negotiator, Angel Gurria – currently Secretary-General of the OECD – asked his country’s commercial bank creditors for a 55% haircut on their sovereign obligations. This was the opening pitch of the Brady Plan that finally resolved the Latin American debt crisis. The Plan was presented to the Paris Club 

Yet another example is Uruguay’s value recovery warrants. In contrast to the oil-linked value recovery mechanisms in Mexico and Venezuela, Uruguay’s value recovery was a modified terms-of–trade index. We included in the numerator the price of the country’s main exports, wool, beef, and rice and, because the country imported oil, the denominator was simply the price of crude petroleum.
The ideal value recovery facility for the European periphery countries would, like Brady-era facilities, vary with the specifics of each case. One alternative is GDP warrants. Others might include an index linked to an international price such as a commodity price or market or industrial index which directly impacts and provides the debtor country with windfall revenues or expenditure reductions.   


A Trichet Plan for the Eurozone

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