Author(s): Rym Ayadi
In: Financial Markets, CEPS Commentaries
Date: 21 October 2011

Download PDF

This paper proposes to tackle the sovereign debt and banking crises with a comprehensive multi-pillar mechanism that involves cash and synthetic solutions aimed at enhancing the European Financial Stability Facility (EFSF), but without necessitating any structural transformation. In this framework, the public and the private sectors would collaborate to design the necessary tools (a blend of cash and guarantees) that are capable of convincing the market. Central to this framework are the credibility of the public-private guarantee of potential future losses and the effectiveness of the instruments to be designed by the mechanism. This mechanism must be agreed at the highest political levels and implemented promptly to halt the downward spiral that will lead to a protracted recession in the EU – a scenario that is highly plausible today, if no credible political action is taken.