Reprofiling Today for a Sustainable Tomorrow: A Unilateral Italian Debt Restructuring

By Emma Cervantes, Victoria Dodev, Shane Ellement, Isabelle Sawhney (Duke University, School of Law)

Italy has €2.4 trillion of debt – an unsustainable level in pressing need of a restructuring. However, traditional avenues for sovereign restructurings cannot be utilized because Italy’s situation is complicated by several factors. First, the massive outstanding bond stock and diversity of bondholders makes a traditional consensual restructuring impractical. Additionally, about 68% of outstanding bonds are held by Italian parties, making any restructuring harmful to the domestic economy. To further add to this complicated situation, the ESM Treaty purports to impose additional restraints on Italy’s ability to restructure through the addition of CACs to approximately 60% of Italy’s bond stock.

Fortunately, there is a loophole in Italy’s bonds that can resolve these problems: Italy can unilaterally extend its maturities without bondholder consent. This power stems from the fact that Italy’s domestic government securities are issued as decrees under the relatively unknown 2003 Consolidated Act, which explicitly grants Italy the power to unilaterally extend bond maturities. Accordingly, 98% of its outstanding bond stock, about €2 trillion, can be restructured without bondholder consent. This strategy could result in the largest sovereign debt restructuring in history being done unilaterally.

This proposal demonstrates that the inclusion of CACs in some of its bonds does not foreclose the use of Italy’s Article 3 power. The proposal also describes the mechanics by which Italy would exercise its right to extend maturities. Unilaterally extending maturities does not require any retroactive utilization of the local law advantage. Nor does it expose Italy to significant legal risks in its domestic courts or under European treaties and conventions.

The full article is available here.