Different lessons For Europe from American financial history–a counterpoint to Mr. Gaspar*

Abstract:

Sovereign debt restructuring played a key role in placing the US federal government on a sound financial footing under its new Constitution in 1789. State governments in the US, like national governments in the euro area, do not have bankruptcy protection. US state governments have not defaulted since the Great Depression, owing to a credible no-bailout policy by the federal government coupled with fiscal rules and an effective signalling of default risk by private markets. At the municipal level in the US, bankruptcy protections apply and recent default experience is very low. With permanent sovereign bailout mechanisms in place in the euro area, sovereign bankruptcy provisions might lessen officially induced moral hazard, allowing market discipline to function more effectively with respect to euro area countries than previously.