The 2012 Greek debt exchange was a watershed event in the euro area debt crisis. It generated fears of contagion and was viewed as a threat to the euro itself. There is a heated debate as to whether the debt restructuring should have taken place sooner. This paper argues that a deep haircut up front, under threat of legislative action, would have been seen as unnecessary and deeply coercive. But delaying the restructuring beyond mid-2011, when it became clear that Greece’s debt was unsustainable, was unjustified. The delay reduced the stock of privately held debt subject to a haircut, possibly making an official debt restructuring inevitable down the road. Initial fears that the Greek debt restructuring would pose a serious threat to the euro area’s financial stability proved to be exaggerated. On the contrary, it demonstrated that an orderly default involving a pre-emptive debt restructuring is possible in a monetary union, provided appropriate firewalls are in place to limit contagion risks. With crisis management institutions and procedures now in place in the euro area, and with much stricter fiscal surveillance, the Greek experience is likely to remain unique in the history of debt restructurings; however, some lessons can be learned from its specific features.
