Publication
Nov 2011
In this brief, the author explores whether there is a fundamental difference between a formal sovereign default with a haircut and debt monetization, which reduces the purchasing power for investors by the same amount. He argues that there is indeed a difference because a formal sovereign default invariably leads to a banking crisis. Moreover, within a monetary union a sovereign is more exposed to liquidity problems than a country with an independent currency and any of its problems quickly spill over into the banking system, which cannot survive without a reliable source of liquidity given that banks are by nature highly leveraged institutions.
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English (PDF, 10 pages, 541 KB) |
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Author | Daniel Gros |
Series | CEPS Policy Briefs |
Issue | 257 |
Publisher | Centre for European Policy Studies (CEPS) |
Copyright | © 2011 Centre for European Policy Studies (CEPS) |