their investment and have not sold their bonds yet, and are confident that with the adjustment programme the country will get back on its feet. restructuring would instead reward the investors who exited the market earlier or short - sold the sovereign bond, speculating that they would gain out of a restructuring. third, it would destabilise the euro area financial markets by creating incentives for short - term speculative behaviour. given that markets are forward - looking, they would try to anticipate any difficulty faced by a sovereign by short - selling their positions, thus triggering the crisis. this would discourage investment in the euro area because of its potential volatility and perverse market dynamics. finally, such a measure would delay any return to the market by a sovereign, because no market participant would be willing to start reinvesting in the country for a long period if they know that this kind of investment might at some stage be penalised. this would thus discourage private sector involvement and oblige the official sector to increase its financial contribution. a clear example is the fear that private sector involvement would be sought automatically under the european stability mechanism. faced with such circumstances, investors would be sceptical about buying government bonds maturing after 2013. and the statement which is often made in this country that “ there will be no restructuring before 2013 ” does little to reassure investors, as it implies that there might be one afterwards. the proof of what i have just mentioned can be found in the data. just looking at the yield spreads between the government bonds of the three stressed countries and those of germany, it can be seen that they were gradually coming down last autumn until the day of the deauville agreement and then spiked up after the october european council, in which it was mentioned that preparatory work on the esm would include “ the role of the private sector ”. renewed public comments about a possible “ soft restructuring ” or “ reprofiling ” of the greek debt in april this year produced an immediate spike of the spreads on greek bonds, with strong contagion effects to other euro area countries ( see chart 1 ). to sum up, private sector involvement, if pursued imprudently, i. e. automatically rather than as the last resort : does not help save taxpayers ’ money ; indeed, it may cost them more money ; favours short - term speculation over long - term investment, which is certainly undesirable ; discourages and even delays any new investments in a country implementing an adjustment

lorenzo bini smaghi : private sector involvement – from ( good ) theory to ( bad ) practice speech by mr lorenzo bini smaghi, member of the executive board of the european central bank, at the reinventing bretton woods committee, berlin, 6 june 2011. * * * the title of this first session of the conference is : “ policy responses within countries and inside the eurozone since 2010 : an appraisal ”. the topic is very broad and i cannot cover it in such a short time span unless i am selective and focus on some specific issues. i would like to consider mainly what has not gone as expected and the disappointments. this enables me to avoid talking, once again, about the ecb ’ s actions over the last 18 months. there are at least three things that have gone wrong. the first is that governments of the countries under stress waited too long before recognising that they needed financial assistance, and submitting their requests for support to the imf and eu. this is true in all three cases, greece, ireland and portugal. more often than not support programmes are delayed and within well integrated economic and financial regions such as the euro area these delays exacerbate market turmoil and create contagion. there is thus an externality in leaving it entirely to the country in question to turn to the imf and eu for financial assistance. however, experience has shown that when a country requests such assistance, the national authorities tend to blame european institutions, including the ecb, for having pushed them to do so. “ europe ” thus becomes a scapegoat and this may fuel strong – although unjustified – anti - european sentiment in the countries concerned. so governments have a natural inclination not to request financial assistance at an early stage. the second thing that has gone wrong has been the implementation of the greek programme of reforms. reform fatigue set in at an early stage and it probably went unnoticed for a while. member states adopting imf / eu programmes have to remain firmly committed to very specific measures, which need to be acted upon from the outset. monitoring has to be strengthened. i will not elaborate on these two first issues but – being here in berlin today – i would like to focus on the third issue which has not gone well, in my opinion, namely the whole discussion about private sector involvement. the point i would like to make is that having the private sector actively involved in preventing and resolving sovereign crises is a