“Whoever reaps the benefits must also bear the liability.” This liability principle, as once described by Walter Eucken, also needs to be applied to sovereign debt. Investors have to perceive a credible threat of losing their money if they buy bonds from governments that have unsound public finances. The crisis has brutally exposed the fact that sovereigns, too, can reach the brink of insolvency.
An orderly procedure for a sovereign default does not yet exist, however. But that is precisely what we need. This is not only about procedural rules, however. It is also about a sovereign default not being allowed to jeopardise the stability of the entire financial system. To a certain extent, the terror has to be taken out of sovereign debt restructuring.