the real economy were likely. 2. the incentive structure might become flawed. moral hazard could be aggravated with regard to the borrower. if a member country knows that it does not have to fully service its contractual liabilities obligations but instead restructure its debt, it may be tempted to accumulate excess levels of debt. 3 3. the credibility of the monetary union as a whole could be scratched. if investors paint the solvent member states with the same brush, risk premia on sovereign bonds would rise sharply affecting the whole specter of credit. 4. last but not least, there are legal considerations. generally, if a government does not service its financial obligations it breaches its legal obligations ( independent of the effective lack of enforceability by the creditors already mentioned ). in the case of the euro area there is an additional trait. article 126 paragraph 1 of the treaty ( which is binding for all eu countries not only those whose currency is the euro ) clearly see bini smaghi ( 2011 ) ; reinhard et al. ( 2003 ) ; ozler ( 1993 ). see ecb monthly bulletin ( 10 : 2011 ). bis central bankers ’ speeches states that a member state “ shall avoid excessive government deficits ”. although there is some scope for interpretation what “ excessive ” means it can hardly be doubted that a deficit that leads to a sovereign default was ultimately excessive. 4 working for the better : closing the implementation gap … these sound arguments call for the avoidance of a sovereign default by all means. but what is to be done instead? the superior avenue is a combination of crisis resolution to curtail the panic and prevention measures to regain confidence. in more detail this means : 1. those countries under the rescue umbrella have to fully implement the conditions of the respective programs in order to return to a sustainable level of debt and regain competitiveness. during the adjustment process they receive financial aid from the luxembourg based european financial stability facility ( efsf ). in order to eliminate any doubts on the sufficient fire power of the efsf, governments of the euro area member states should provide appropriate leveraging of the fund – not to be confounded with monetization. it is also important that the efsf operationally can intervene in the secondary markets as soon as possible to tackle fundamentally unfounded distortions in the sovereign bonds markets. these distortions hamper the smooth functioning of the single monetary policy stance. 2. macroeconomic imbalances and unsustainable fiscal policies must

currency union a whole. 5 concluding remarks the epicenter of the global financial crisis has shifted from the us to the euro area. the rapid spreading of the crisis is reducing the options at hand to tackle the crisis. europe has already taken important decisions to improve its crisis resolution mechanism and to strengthen preventive measures to avoid macroeconomic imbalances and unsustainable fiscal policies. it is important to implement these rules now and make the institutions operational, as markets tend to lose patience. there is a strong appetite for a comprehensive solution. the banking sector must increase its resilience against sudden, external shock. this is particularly important in times of high market volatility and elevated uncertainty. quick action is needed to clean up banks ’ balance sheets and recapitalize them, where it is deemed necessary. on top, countries with elevated debt levels and augmented budget deficits have to put public finances on a more sustainable path and spur growth by structural reform. sovereign defaults should be avoided as the cost most likely would outbalance the benefits by far. the ecb has repeatedly objected to all concepts of debt restructuring that are not purely voluntary or that have elements of compulsion ; any credit events and selective default or default should be avoided. a strong and transparent commitment to sound public finances is the best weapon to combat market attacks. * * * thank you for your attention. see ecb monthly bulletin ( 10 : 2011 ). bis central bankers ’ speeches