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101020Causesandconsequencesofalossoffinancialstability
Anextremesignofthestate’slossoffiscalstabilityisitsbank-
ruptcy.Thetermcanbedefinedasaunilateralcancellationby
thestateofallorpartofitsdebtliabilities(repudiation)and
aforcedrevisionofcontractualstipulations(conversion),re-
sultinginlimitationsofthelender’srights.Mostfrequently,this
situationoccursduetoerrorsmadewhileimplementingfiscal
policy.Attimes,however,thedisturbanceoffiscalstabilityis
aconsequenceofprocessesandphenomenathatareextrinsicto
thepolicypursuedbythegovernment.Inthatrespect,extreme-
lyimportantare,forexample,mutualinteractionsbetweenthe
stateandthefinancialmarket,asthestatemaygobankruptnot
onlybecauseofinsolvencybutalsoowingtogrowingliquidity
problems8.ConsideringtheHherding”behaviouroftheholdersof
Treasurybonds,socialprocesseslikethatcanprovetobehighly
dynamic.Ofparticularimportanceinthatrespectisthefactthat
theamountofexpendituresrelatedtorepaymentofearliercon-
tractedobligationsdoesnotdependoncurrentfiscalpolicy.In
theshortrun,theabilitytoprovidemarket-basedfundingofthe
state’sloanneedsatacceptablecostsbecomesaconditiosinequa
nonoffiscalstabilityofthestate.Thefactorswhichcontributeto
thelossofthisabilitymayincludethephenomenaandprocesses
takingplaceinthefinancialmarket,asthesituationintheEU
ofthelastyearshasshown.Thegeneralriseofriskaversionhas
shiftedinvestors’intereststowardsfinancialinstrumentsissued
bythosewhoenjoythehighestcreditrating(e.g.thebondsis-
suedbyGermanyortheUK).Thishasshatteredtheprocessof
financingtheborrowingneedsofsomestatesoftheEurozone
(e.g.Greece,Portugal,andIreland).Theywerefacedwithamost
disadvantageoussituationinwhichthegrowingdemandforre-
turnablebudgetaryfundsmetwithadecliningdemandforthe
debtsecuritiesissuedbythemandagrowingrealinterestrate.It
shouldbenotedinpassingthatTreasurybondsusuallyrepresent
ahighshareofbanks’assetsandthoseofotherfinancialinsti-
tutionsduetothelowvaluationoftheriskattachedtothem9.
8N.Roubini,HowtoAssessWhetheraCountryisInsolvent,SternSchoolof
BusinessNewYorkUniversity2001,p.11.
9IMF,AssessingStability…,p.22.
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PARTI.FINANCIALPOLICYOFTHEEUROPEANUNION
