If the probability of this event concentrates over the short horizon, then the cumulative default probability for longer horizons (bounded overall by 100%) cannot rise much further, and inversion of the spread curve necessarily follows. Redenomination premia share some similarities with exchange rate premia that were driven out of control in the early 1990s by speculative attacks against the legacy currencies. The early symptoms – inverted sovereign yield curves, at least for some contries – were the same. And the potential of such attacks is known to generate self-fulfilling prophecies. In early summer 2012 this situation had two main implications. One was for fiscal policy: it needs to deliver sound fundamentals as the only way to lastingly overcome the crisis; but, at the same time, there can be no viable fiscal adjustment that can ensure sustainability if the interest rate faced by the fiscal authority keeps rising and there are severe distortions in government bond markets. The second implication was for monetary policy: the central bank cannot fulfil its mandate to maintain price stability if its policy intentions are not transmitted correctly to the real economy through the chain which forms the basis for monetary policy transmission; but, at the same time, the central bank cannot fulfil its mandate to maintain price stability if the fiscal authority does not fully honour its obligation to pay back its liabilities under all circumstances.

Regrettably, fiscal developments have worsened recently in a few accession countries, reflecting ongoing restructuring programmes and higher expenditures related to the adoption of EU standards, but also the lack of a realistic medium-term fiscal strategy. In addition, structural deficits have become rather large and public debt ratios have started to increase, limiting the room for manoeuvre of automatic stabilisers. Overall, the need for further fiscal consolidation seems overwhelming, as fiscal slippages could put under pressure and even endanger the macroeconomic stabilisation achieved thus far. Finally, let me turn briefly to the third component of, or perhaps better complement to, stability-oriented policies in accession countries that I will be addressing today: the implementation of further structural reforms. Stability-oriented policies can best be supported by structural reforms, as they enhance the flexibility of the economy to adjust to necessary changes and cope with potential shocks. Moreover, structural reforms are also key determinants of the medium-term growth potential. In the case of the accession countries, structural reforms are even more important because they are necessary to complete the full adjustment of the accession countries' economies toward well-functioning market economies, including the setting-up of appropriate institutions and the adoption of international best practices in a number of areas. Completing this agenda is a challenge for the accession countries, particularly because of the sheer magnitude of pending reforms. Moreover, structural changes may complicate the conduct of monetary policy, as structural reforms may cause structural breaks that complicate the pursuit of credible disinflationary policies.