By being tied to an effective macroeconomic adjustment programme, the initiative prevents the intervention on government debt markets to eliminate “redenomination risk” – the unwarranted perception of a risk of euro breakup – from becoming a subsidy for unsustainable national policies.
The European Stability Mechanism will impose on sovereign issuers the same solvency conditions as those imposed by the ECB on banks when it provides them with liquidity. And sovereign solvency is a necessary condition to avoid fiscal dominance on monetary policy, and thereby for the ECB to fulfil its medium term objective.