We need to make sure that sovereign debt restructuring is possible without bringing down the financial system as a whole. To that end, more than three years ago the Bundesbank proposed automatically extending government bonds’ maturity by, say, three years if the member state is granted financial support from the European Stability Mechanism.
This would help to figure out if the country’s problem is one of temporary illiquidity or insolvency. Additionally, doing away with the preferential treatment of sovereign debt in banks’ balance sheets is of the essence. The current regulatory framework permits preferential treatment of sovereign exposures in various forms.