Publication

After the Lehman experience, the official policy line in Europe is that liquidation must now be avoided at all costs. This applies in particular to sovereigns and their banks. How is this policy implemented? Most public attention has focused on the bail-out of countries via the EU/IMF package of €110 billion for Greece and later the creation of the so-called European Financial Stability Facility (EFSF). But given that banks and the government are so intertwined, it does not matter whether it is the sovereign that is over-indebted (Greece) and thus drags down its banks, or whether, on the contrary, it is the banking sector that is insolvent and drags down the sovereign (Ireland).