The ECB’s commitment to provide liquidity insurance has successfully calmed unwarranted fears of a roll-over crisis in distressed euro area sovereigns.
In general, the imperfect pledgeability of future income results into a demand for as well as a shortage of liquidity with far reaching implications for the financial system.8 In this perspective, private risk sharing is always imperfect and may lead to financial crises induced by liquidity shortages, which can only be alleviated through provision of public liquidity.