VIPS Makes it Easier for Creditors to Estimate Maximum Losses

VIPS - the Viable Insolvency Procedure for Sovereigns - is a

well-defined debt restructuring mechanism proposed by ZEW for the event of government insolvency. Friedrich Heinemann, one of the co-authors of the proposal and head of the Research Department "Corporate Taxation and Public Finance" at ZEW, explains why it can work.

Friedrich Heinemann is head of the research unit Corporate Taxation and Public Finance at the Centre for European Economic Research (ZEW). He also teaches economics at the University of Heidelberg. His research focuses on empirical public finance, fiscal competition, the European Union, federalism in Germany and Europe, and the factors determining whether states and societies can adopt reforms. He studied economics and history at the University of Münster, the London School of Economics and the University of Mannheim.

What incentives does VIPS offer eurozone member states to accept the debt rescheduling mechanism?

A clearly defined insolvency procedure can help stabilize markets for government bonds in the eurozone. Without such a procedure, investors cannot know how much they stand to lose should the worst case scenario – government bankruptcy – occur. The VIPS we’ve proposed helps investors reliably estimate the maximum amount they could lose. This expectation anchor can aid in the prevention of panics.

A novelty about VIPS is that it’s designed for the long term. There’s a transition phase lasting up to 16 years before the mechanism takes effect. Doesn’t the proposal run the risk of being abandoned by future governments?

Once the VIPS and its transition regulations become anchored in the ESM Treaty, it will be difficult to roll back. Every subsequent change would require the unanimous decision by the treaty’s signatories. A country can exit the ESM Treaty, but then it forfeits its claim to any emergency loans from the ESM.

You devote much energy to studying the ability and willingness of societies to adopt reforms. How do you rate the chances of euro countries’ agreeing on VIPS or on a similar debt rescheduling mechanism?

Not bad. The politicians who back VIPS today would be already retired by the time it takes full effect. This makes it easy for them to accept VIPS today.