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

Italy has €2.4 trillion of debt. Should it ever find itself in pressing need of restructuring it, traditional avenues for sovereign restructurings could not be used because of a number of factors complicating Italy’s situation.

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. In particular, approximately 20% of the debt is owned by Italian banks, and about another 20% is owned by other Italian financial intermediaries, creating a ‘doom loop’ scenario where a reduction in the value of Italy’s bonds harms the banking and financial sector and thus, the greater economy. To further add to this complicated situation, the Treaty Establishing the European Stability Mechanism (ESM Treaty) purports to impose restraints on Italy’s ability to restructure through the addition of Collective Action Clauses (CACs) to approximately 60% of Italy’s bond stock. As such, many believe that the ESM Treaty forces Italy to restructure its debt with bondholder consent through CACs— which, as discussed, is practically impossible due to the extensive debt stock and diversity of bondholders.

Fortunately, there is a loophole in Italy’s bonds that can resolve these problems for all of its debt: 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 this power. Article 3 of the Act provides that the Treasury may ‘proceed, in order to restructure the national and external public debt ...to the transformation of maturities’. Accordingly, 98% of its outstanding bond stock, about €2 trillion, can be restructured without bondholder consent. This strategy would not only be a streamlined approach to Italy’s extensive debt problem, but could result in the largest sovereign debt restructuring in history being done unilaterally.

Our paper ‘Reprofiling Today for a Sustainable Tomorrow: A Unilateral Italian Debt Restructuring’ demonstrates that the inclusion of CACs in some of its bonds does not foreclose the extension of maturities pursuant to Article 3. The paper also describes the mechanics by which Italy could exercise such power.  Unilaterally extending maturities would not require any retroactive use of the local law advantage. Nor would it expose Italy to significant legal risks in its domestic courts or under European treaties and conventions.

The presence of CACs in some bonds does not foreclose Italy from using its Article 3 power to unilaterally reprofile those bonds. The ESM Treaty and the language of the model-CACs advocate for the implementation of ‘standardized and identical’ CACs in a way that ‘ensures that legal impact is identical’. The CACs include a reserved matter for ‘chang[ing] the date on which any amount is payable on the Bonds’. On the surface, the reserved matter and the ESM Treaty appear to prevent Italy from extending maturities without the requisite CAC bondholder approval. However, nothing in the Treaty’s language ensures that the model-CACs will be implemented in such an identical manner or obligates sovereigns to use them in a restructuring. Our paper shows that the Vienna Convention on the Law of Treaties confirms this interpretation. 

Finally, Italy’s use of its power to unilaterally extend maturities would also not be a violation of Article I of Protocol No. 1 to the European Convention on Human Rights (Article I). Even if the European Court of Human Rights (ECtHR) found unilateral extension of maturities to be an interference with property in violation of Article I, Italy would be successful if the maturity extension were to be proportionate to its economic needs. Mamatas and Others v. Greece provides guidance as to how the ECtHR would analyze this challenge. A successful restructuring requires a public-interest aim, and the burden of the restructuring must be proportionate to this aim. Much like Greece, Italy could claim to have the legitimate aim of stabilizing its economy and restructuring its debt in the general interests of its population.

Emma Cervantes, Victoria Dodev, Shane Ellement and Isabelle Sawhney are J.D. Candidates at Duke University, School of Law, and guest contributors to the Oxford Business Law Blog.