Friday, November 18, 2011

CEPS - Speculative Attacks within or outside a Monetary Union: Default versus Inflation (what to do today)

"...Daniel Gros explores whether there is a fundamental difference between a formal sovereign default with a haircut and debt monetisation, 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..." 

Source (download):

No comments:

Post a Comment