Ignacio Tirado

Sweet and Lowdown: A Resolvency Process and the Eurozone’s Crisis Management Framework

The massive crisis lingering in the Eurozone for almost 4 years now has been confronted by an enhanced integration of fiscal policies and regulations, an increase in the control mechanisms by EU institutions, and by the creation of ex post crisis management instruments to deal with the severe financial trouble of the sovereigns. These ex-post instruments, embodied in the European Stability Mechanism (ESM) and regulated in its Treaty of creation (TESM), constitute a limited solution to the problems posed by the distress of the Eurozone countries. It is the present article’s purpose to examine to which degree, if at all, this mechanism is reconcilable with a more ambitious approach, that includes a more elaborated and structured procedure: the Resolvency Model. Accordingly, we begin by contextualizing the current institutional setting of the Eurozone´s Crisis Management Framework and briefly summarizing the main characteristics of the ESM. Once the description of the current situation shows us where we stand, we purport to explain the Resolvency model in some detail. In this context, we will try to spot the parallelisms and differences between the two approaches in order to examine if there are possibilities to reconcile the two of them. The task is carried out not as a mere intellectual exercise but with an eye on the practical feasibility – in particular with respect to an amalgamation of the two approaches. We believe that the ESM and the Resolvency system are complementary in an important number of tasks and competences. However, we do not consider the current ESM model, as a stand-alone solution, to be fully adequate. We conclude that many of the ESM’s shortcomings would be solved by the introduction of the Resolvency model. One of the main problems of the current ESM system is its excessive exposure to political influence. Be it by means of the adoption of a Resolvency model, or by any other set of amendments, the ESM ought to be transformed into a technical instrument to enhance the efficient development of the Eurozone as a whole, stripped of political influence and the individual interest of countries.

At the Core of the Sovereign Crisis in Spain: Restructuring Subnational Debt vs Internal Bail-Out

Spain´s sovereign crisis has many sides and causes. An unviable economic model and an insolvent financial sector generated a private sector crisis that rapidly spread to the Government´s balance sheet. The public sector itself had –and continues to have- its own serious dysfunctions. One of the main problems lies with Spain´s territorial administration. Subnational entities, in deep financial trouble since the onset of the crisis, are tasked with the provision of the most essential public services, and, as a consequence, the application of strict austerity measures on the regions has caused severe pain on citizens. Social discontent has been used by local politicians to agitate separatism. The situation has generated uncertainty about Spain’s future, posing additional hurdles to the country’s economic recovery. Mirroring the approach adopted by the EU towards its troubled sovereigns, the Spanish Government has mainly confronted the problem of subnational distress by means of fiscal transfers (bail out). In this paper, it will be argued that this highly complex problem demands a comprehensive approach and adequate focus. We argue that an amendment to the current fiscal system to enhance tax autonomy and regional self responsibility ought to be considered; we also argue that a restructuring of the subnational debt would (i) discharge the central government of a sizable amount of debt, (ii) allow the normal market dynamics to work to a fuller extent and, more importantly, (iii) alleviate the pressure on the regions, that could resume rendering basic social services at acceptable levels, stripping at the same time nationalistic Governments of their main argument to dismantle the country in their own benefit. The reduction of the general debt burden and the softening of the territorial tensions would place Spain in a much better position to fully recover from the crisis.

Stability, Flexibility and Proportionality: Towards a Two-Tiered European Banking Law?

The banking regulatory framework adopted by the European Union is both stern and unidimensional. Proportionality in banking regulation and supervision is mainly a theoretical reference, with little or no practical implementation. On the face of it, the fundamental choice to apply the Basel standards to every European bank, no matter the size, systemic relevance or complexity, would seem to provide certainty and hence stability for the benefit of the whole banking sector. However, the “one size fits all” approach hinders the development of smaller banks by creating competitive distortion. This papers purports to provide ideas that will relax the system and, based on an ad hoc, bespoke assessment, will provide for flexibility and proportionality for a key part of the banking sector, while maintaining stability. The paper contains a proposal for criteria to make a proper distinction between “small” (tier 2) and “large” (tier 1) banks in this context. It also provides the contours of the manner in which the rules applying to the tier 2 banks should be determined.

Sovereign Insolvency in the Euro Zone Public and Private Law Remedies

In the wake of the global financial crisis, the economically weaker countries of the European Union that adopted the euro as a common currency soon started to feel the pressure of markets. In a monetary union, with one single central bank in charge of the monetary policy but without a common fiscal policy, or even an adequately coordinated one, those countries with oversized government structure and/or an internal balance of payments deficit became rapidly affected by the lack of confidence that was rapidly spreading in the global financial markets. It started with Greece, moved to Ireland and Portugal and the risk of full contagion to Italy and Spain, the euro zones 4th and 5th largest economies, posed a real threat to the existence of the euro itself. In light of this, the EU has realized the need to react. Some new measures have been adopted and more – the majority – have been announced but are not even underway yet. This article concentrates on the measures that relate directly to the risk of insolvency of a member state; to its prevention, control and avoidance (ex ante mechanisms), and to the instruments foreseen for its solution (ex post mechanisms, with particular regard to the new European system of collective action clauses). It is here suggested that the measures aimed at strengthening the controls, increasing transparency and beefing up the powers of the European institutions create a robust framework capable of avoiding future crises. Conversely, it is argued that the reactive mechanisms envisaged in the new framework might not be so adequate. Europe might have erred by prioritizing “public law” solutions over “private law” mechanisms, since this type of approach could lead to unfair and inefficient results. Although the European collective action clauses will not help to solve the current crisis, they could place euro zone countries in a better position to tackle future sovereign crises. However, the current design of collective action clauses could be improved and uncertainties remain as to their implementation. It is here concluded that there has not been a better time than this one to opt for a comprehensive solution to sovereign insolvency in the euro zone, a solution that involves public and private creditors in an organized, full sovereign debt restructuring mechanism.