Publication

This study suggests what a future framework for sovereign debt crisis management and prevention in the euro area should look like. As a basic rule, it should distinguish between liquidity problems and solvency problems. In cases of liquidity problems, emergency loans at a low interest rate should be made available. In cases of insolvency, an orderly restructuring of debt should be chosen. However, this is easier said than done as the volumes needed for liquidity support might be very large. Increasing the volume of the European Stability Mechanism (ESM) might endanger France’s credit rating. Meanwhile, even an orderly default of a state could trigger a banking crisis.