A no-bail-out clause is already enshrined in the European treaties, but many investors were inclined to believe that the clause would not be applied in an emergency. This implied that, ex ante, investors did not demand sufficiently higher premia for holding government bonds with higher default risk.
By contrast, if the threat of a default is credible, this will foster stricter market oversight and induce less fiscal profligacy ex ante. In equilibrium, default will be less, not more, likely. But how can a no-bail-out clause be made credible?