The ECB and the Eurozone: A comprehensive restructuring plan is needed

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Undoubtedly, the individual member nations need to fix their structural fiscal problems to spur growth.  However, true economic growth cannot occur until the debt crisis is over.  Nations, like corporations, are unable to grow when their primary concern is avoiding defaults and making interest payments or paying down debt.  Over-levered eurozone members must reduce their principal debt burdens, which cannot be accomplished without the holders of the debt taking a significant haircut.  The wrinkle is that the European banks are significant holders of sovereign debt and, if they take a major haircut without additional capitalization, many of them could fail.  Consequently, a meaningful haircut in debt could lead to an economic collapse in Europe with repercussions felt across the globe.
 
Only the ECB – with the support of the Eurozone – can help avoid a bad ending to the European debt crisis.  Now, more than ever, the Eurozone needs to embark on a bold restructuring and recapitalization plan, which would consist of the following:
 
o   The debt of the member nations would be reduced to manageable levels through pay downs and voluntary write-downs by banks.
 
o   “Eurobonds,” which would be akin to U.S. treasury bonds, would be issued by the Eurozone.
 
o   The funds received by the Eurozone would be used to pay down debt and recapitalize the European banks.
 
o   The “investment” in the European banks would be in return for preferred stock, which would be issued to those Eurozone members that experienced an increase in borrowing costs as a result of the creation and issuance of Eurobonds.
 
If a bold plan is not agreed upon and consummated soon, the Eurozone may not survive.  More importantly, European banks may fail, which would likely spread Europe’s debt woes around the world.  The member nations of the Eurozone need to push aside politics and implore the ECB to step in as the lender of last resort, thereby creating stability, while a real restructuring plan can be put in place.

Jonathan S. Henes is a restructuring partner at law firm Kirkland & Ellis.