. third, if the government is still running a primary deficit, it will not have the funds to pay for some of its key functions. fourth, in the euro area the sovereign does not have a domestic central bank that will finance its deficit. fifth, after a default / restructuring the banking system of the country would be unlikely to pass the stress test and have sufficient adequate collateral to access the ecb ’ s refinancing operations. what are the implications of this analysis? imposing haircuts on private investors can seriously disrupt the financial and real economy of both the debtor and creditor countries. it ultimately damages the taxpayers of both the creditor and debtor country. this is particularly the case in a region like the euro area, consisting of advanced economies with highly integrated financial markets – an integration we have encouraged for years. this is why such restructuring should only be the last resort, i. e. when it is clear that the debtor country cannot repay its debts. incidentally, this is the way the international community has functioned and cooperated since the bretton woods agreement, which set up the imf. countries are never encouraged to default or restructure their debts unless they are in a desperate situation and have no alternative. this is why there have been relatively few cases of debt restructuring and defaults, and they have affected poor and often undemocratic countries. where is the problem? the problem emerges when debt restructuring is carried out not as the last resort but as a preventive tool, even becoming a precondition for receiving ( or see trebesch, 2008. see, for instance, reinhart et al. 2003 and ozler, 1993. bis central bankers ’ speeches providing ) financial assistance, a point mentioned in some official circles since mid - october 2010. debt restructuring would be a way to tackle not only dramatic cases of insolvency but also any difficulties countries face in accessing the financial markets. why is it a problem? first, as i already mentioned, it would not be a way to prevent taxpayers from suffering the consequences of bad investment decisions. in our monetary union, given the integration of financial markets and the single monetary policy, the taxpayers of the creditor countries would suffer in any case. according to the financial times, for instance, a default on greece ’ s debt would cost the german taxpayers alone “ at least €40 billion ”. 8 second, this would be a way to punish patient investors, who are sticking to

experience faster overall economic growth. in addition, the financial integration of the euro area has made large progress during recent years. this has increased the competitiveness of the euro area. notwithstanding some reforms, which appear necessary especially following the experience of the recent financial turmoil and further steps which are needed on the way to a fully integrated euro area financial system, the progress already achieved is highly beneficial for the efficiency and competitiveness of the euro area financial system and will ultimately foster the performance of the euro area economy. references / background material : aghion, p., fally, t. and s. scarpetta ( 2007 ), “ credit constraints as a barrier to the entry and post - entry growth of firms ”, iza discussion paper no. 3237. cappiello, l., briefing for the visit of the conseil economique et social ( cmt / 0208 ), 18 february 2008. decressin, j., faruqee, h., fonteyne, w., integrating europe ’ s financial markets, international monetary fund, 2007. de santis, r., the determinants of cross - border m & as : institutional and financial forces, balance of payments review, november 2007. european central bank, financial integration in europe, march 2007. european central bank, financial integration in europe, march 2008. european central bank, monthly bulletin, assessing the performance of financial systems, october 2005. european central bank, monthly bulletin, the contribution of the ecb and the eurosystem to european financial integration, may 2006. european central bank, monthly bulletin, sectoral patterns of total factor productivity growth in the euro area countries, box 6, october 2007. european commission, white paper on financial services policy 2005 - 2010, december 2005. fisman, r., and love, i., financial development and growth in the short and long run, national bureau of economic research, working paper no. 10236, january 2004. fontagne, l., g. gaulier and s. zignago, specialisation across varieties and north - south competition, economic policy, january 2008. gropp, r., c. kok sorensen, j. - d. lichtenberger, the dynamics of bank spreads and financial structure, ecb working paper no. 714, january 2007. guiso, l., jappelli, t., padula, m