The implications of the suggested permanent EU rescue mechanism

Let us consider the implications of the suggested permanent EU rescue mechanism that should come into the force after 2013 when €440bn intergovernmental financing facility expires.


Market price of the government bonds mainly fluctuates because of the time approximation to its maturity and fluctuations in interest rates. However, if European Union countries agree on the proposed sovereign debts’ restructuring regime that involves losses for private investors, it will not just raise the yield to maturity of the government bonds and decrease the market price of it. In this case the worse nation’s borrowing conditions is not the main threat of the poor public finance management that country should expect. The more important is the legal consequences of the excessive borrowing. As long as bankruptcy is the transfer of the ownership rights and investors of the country’s bonds are involved in the debt restructuring, the nation's exposure to the lost of its sovereignty.

So, there are two outcomes for further inefficient public finance management. If majority of the EU states reject the conditions of the proposed EU financial rescue mechanism, the people of the country will keep the right to change the leaders. Once the new financial support mechanism is accepted the state’s governance rights may be transferred to more efficient and advanced European countries.