Publication - Tackling sovereign debt crises more effectively
During the course of the financial and sovereign debt crisis, a number of new mechanisms were created in the European monetary union to coordinate and overcome crises.
This resulted in the joint liability of the member states being extended, whilst, at the same time, allowing them to remain largely accountable for their own financial and economic policies.
However, this mismatch between liability and control creates misguided incentives for policymakers and financial market players. In its latest Monthly Report, the Bundesbank presents a number of different approaches, which could contribute towards strengthening individual national responsibility as well as help avert and combat sovereign debt crises more effectively in future.
Since 2012, the European Stability Mechanism (ESM) has been in place as a permanent assistance fund to provide member states facing acute financing problems with temporary liquidity assistance in cases where the financial stability of the monetary union is at risk. This gives a member state more time to implement the necessary economic and fiscal reforms in order to restore a sustainable financial situation.
To this end, a target-oriented reform and adjustment programme is agreed with the member state, which is also intended to ensure that it is able to repay the financial assistance. As a general rule, the fund is only able to grant financial assistance if a member state is experiencing temporary liquidity problems and the state is not fundamentally insolvent or unwilling to repay its debts. It is often difficult to make this distinction under potentially considerable time pressure when a member state is facing acute financing problems.
At present, the ESM finances both ongoing deficits as well as extensive redemptions of government bonds which are due to mature over the course of the programme. This way, investors are released from their liability and considerable risks are transferred to the taxpayer. This also results in the available funding volume becoming heavily depleted. In order to alleviate these problems, the Bundesbank proposes, among other things, that the design of government bond issues be adapted in future.
page source http://www.bundesbank.de/
