A (Voluntary) Offer They Can't Refuse: Restructuring Italy's Sovereign Debt

Italy is not Greece, but it faces considerable financial challenges in the coming years. Although we find that the Italian debt stock is quite conducive to a restructuring via local law, the lessons learned from Greece caution against taking drastic action now that would compromise Italy’s ability to confront a possible future crisis. Thus, we propose a modest plan that would allow Italy to take action now and achieve meaningful results while remaining prepared for what the future may bring. Specifically, we encourage Italy to lessen its debt load through a voluntary bond exchange in which Italy issues new Italian-law bonds with reduced principal in exchange for increased investor protections against further restructuring. Our analysis proceeds in four parts. Part I assesses Italy’s current situation in light of the recent Greek restructuring. Part II examines the Italian debt stock, with emphasis on its current ownership and governing law. Part III considers the range of options available to Italy at this time. Finally, Part IV explains our plan for Italy.