November 29, 2010
European finance ministers hope that establishing the ground rules for bailouts of euro-zone governments after July 2013 will help calm financial markets spooked by the prospect of defaults in Europe's sovereign bond markets.
That isn't because their plan rules out future defaults—in fact, it explicitly talks about the possibility of forcing holders of government bonds to take losses or "haircuts" on their investments. But it does aim to lessen uncertainty and also makes clear that government bondholders won't be forced to take losses as a precondition of a bailout, as Germany had originally proposed.
The plan is for the International Monetary Fund and the European Commission, the EU's executive arm, to decide—together with the European Central Bank—whether a country's payment problems are an issue of insolvency or simply a short-term cash shortage. The analysis would have to be agreed by a unanimous vote of euro-zone finance ministers.
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