Ricardo Salgado, the former head of ailing Portuguese bank, Banco Espirito Santo, who was questioned at a Lisbon court (photo: dpa)

How bail-in, bailout, and no economic rescue for countries will work in future

Recession may be over in most Western economies but the recovery is still fragile and slow. Sustaining current public debt levels in many European countries is precarious. But central bankers are sending out a confusing and mixed message which is doing nothing to calm the nerves of anxious investors.

<i>Banking crises in Bulgaria, Austria and Portugal have demonstrated that the banking industry is fragile, monitoring by central bankers does not work and that local defaults are real possibilities. The sustainability of public indebtedness hangs by a thread in several countries. The well-known bailout strategy pursued by many central bankers over the past few years may no longer b...

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Professor Enrico Colombatto
The lack of appeal of bailout proposals relates to the fact that as long as the debt is alive, substantial resources - tax revenues - are used on debt-servicing. A rise in interest rates, increasing resistance to increased taxes and political difficulties in achieving drastic cuts in public spending are all good reasons to consider some form of controlled default
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