the 1 - to - 1 peso - dollar parity had been abandoned ). by contrast, there are countries and governments that can sustain much higher borrowing levels. a striking case is japan, whose public debt recently reached 220 per cent of gdp without giving rise to significant market tensions. several authors have argued that the degree of debt intolerance ultimately depends on the quality of a country ’ s institutions. in particular, sovereign default is often the outcome of a political struggle among different groups of citizens and is more likely to happen if domestic debt - holders are politically weak and the political price of the financial turmoil typically triggered by a sovereign bankruptcy is low. these conditions are in turn more likely to be present if a country lacks a politically strong middle class and / or a sufficiently independent central bank 3. as balcerowicz remarks, in a world of financial liberalization the traditional distinction between domestic and foreign debt may not be that useful in explaining governments ’ willingness to pay. while in the cases of russia ( 1998 ) and argentina the distribution of the public debt between resident and non - resident holders certainly did matter, with governments treating domestic creditors better than foreign ones, in the case of turkey ( also in 2001 ) default was not contemplated and the government took measures that helped to service the debt owned by both domestic and foreign creditors. it is worth noting that the share of public debt held by non residents has risen significantly in all european countries, owing to the integration of financial markets. however, not only the composition of debt holders but also other characteristics of the public debt matter in such circumstances. for example, a long enough maturity of government debt can make default avoidable, even for a country that records sizeable increases in yield spreads. the average cost of debt would react slowly, buying the country considerable time to convince the market of its solvency. it can be debated whether the existence of alternative sovereign debt resolution mechanisms can create different ex ante incentives, influencing the behaviour of sovereign debtors and their creditors. the lecture delves into the pros and cons of the sovereign debt restructuring mechanism ( sdrm ), a debt resolution mechanism, yet to be implemented, proposed in 2001 by anne krueger, then imf first deputy managing director. balcerowicz concludes that the sdrm is functionally equivalent to the already existing debt resolution mechanisms, and says that more faith should be placed in the working of “ pure market solutions ”. however, he also seems to accept the notion that,

system ( a proposal not limited, in this case, to the eu ). 9 both types of proposal are interesting and may improve market liquidity. the first would be especially directed at reducing the burden of debt, the second at offsetting the negative consequences of debt accumulation related to the financial crisis. they leave, however, significant open questions. to mention only a couple : ( i ) it may be hard to reach a consensus on the definition of the share of debt that has to be pooled ; ( ii ) countries having debt substantially in excess of such a share may face a bond market liquidity problem. in addition, these proposals pose problems in terms of incentives to participate for countries with lower debt and higher credibility ( typically germany ) and with less debt directly tied to rescuing the financial system ( typically italy ). more generally, these schemes imply some cross - subsidization which is hard to price, even though in the case of the establishment of a fund, profits may be used to progressively compensate different country contributions. but we should be aware that weak fiscal positions are not the only source of the tensions on sovereign debt. in 2007 ireland and spain recorded fiscal surpluses ( respectively 0. 3 and 1. 9 per cent of gdp ) and had relatively low public debt - to - gdp ratios ( 25 and 36 per cent, respectively ). this suggests, as balcerowicz also acknowledges, that standard fiscal indicators are not sufficient. moreover, a tighter fiscal policy can sometimes help, but it is not a panacea for macro imbalances. the european commission now suggests introducing a new excessive imbalances procedure. it will comprise the regular assessment of the risks of imbalances based on a scoreboard composed of several economic indicators. indicators of both the external position of the economy ( e. g. current accounts, external debt, real effective exchange rates ) and of the internal situation ( e. g. private, as well as public, sector debt ) should be considered. the proposal, though important, faces three difficulties : first, detecting macroeconomic imbalances may not be simple ; second, identifying appropriate policies to address structural problems is not straightforward ; third, putting pressure on a country from brussels can be politically difficult when all seems to be going well. this is an area in which national independent authorities could have a role. a very important issue concerns the lessons we have learnt from the crisis for the design and the conduct of our monetary policy, as well as for