This document summarizes and analyzes a policy paper that proposes a two-step market-based approach to debt reduction in the eurozone without default.
Step 1 involves the EFSF exchanging existing Greek, Irish, and Portuguese government debt for EFSF bonds at market prices over 90 days. Step 2 assesses debt sustainability and either writes down debt to market levels if sufficient, or agrees to lower interest rates with GDP warrants. The goal is to restore private market access without seniority over remaining private claims. The ECB would stop bond market interventions, and the IMF could provide bridge financing until fiscal adjustments are complete.