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Contribution Details
| Type | Other Publication |
| Scope | Discipline-based scholarship |
| Title | The Euro Area Sovereign Debt Crisis: Secure the Debt and Modify Haircuts |
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| How Published | Swiss Finance Institute Occasional Paper Series (2011, No. 01) |
| Date | 2011 |
| Zusammenfassung | The euro area sovereign debt crisis and its corollary, the looming threat of a euro crisis, has been facilitated by a monetary design that has permitted the euro to be backed by unsecured sovereign debt at haircuts that appear to have been too low. For example, as of the time of writing, the ECB applies a haircut of 3 % on 6 year Spanish and Italian government bonds, the same as on a corresponding German government bond. The low haircuts have allowed cheap and excessive public borrowing, and the lack of security is now making it hard for creditors to collect on their loans. As a first step towards a sounder euro area monetary system, sovereign debt should be collateralized. The rules for setting haircuts should also be reviewed. |
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