Table Of ContentThe European Sovereign Debt Crisis
The European Sovereign Debt Crisis: Breaking the Vicious Circle between Sovereigns
and Banks explains why the euro area’s progress towards reining in the
risks arising from the well-documented bi-directional financial contagion
transmission mechanism that links sovereigns to commercial banks has been
more prominent compared to the channel of contagion moving from banks
to sovereigns.
Providing an analysis of the legal and regulatory measures that Europe and
the euro area have taken to mitigate the exposure of sovereigns to financial
crises generated by commercial banks, this book draws attention to areas
where improvements to the arsenal of tools hitherto introduced are either
desirable or necessary. Chapters further explain – with recourse to economic
and legal arguments – why the channel of contagion moving from sovereigns
to commercial banks has proven harder to close, and explores ways in which
progress could be made in the direction of closing it so as to avert the risk of
future banking sector crises.
This work provides essential reading for students, researchers and practitioners
with an interest in sovereign debt crises and the euro-area banking system.
Phoebus L. Athanassiou (LLB, LLM, PhD) is Senior Lead Legal Counsel with
the Legal Services of the European Central Bank, a published author of works
on banking and financial law, and a member of the Academic Faculty of the
Institute of Law and Finance at the Goethe University of Frankfurt, Germany.
Angelos T. Vouldis (MEng, MSc, PhD) is an Economist at the European
Central Bank, with year-long policy experience in financial crises and the stress
testing of financial institutions. He has published extensively in leading journals
on banking, financial stability, business cycles and institutional change.
Routledge Research in Finance and Banking Law
Housing and Financial Stability
Mortgage Lending and Macroprudential Policy in the UK and US
Alan Brener
Conceptualizing the Regulatory Thicket
China’s Financial Markets after the Global Financial Crisis
Shen Wei
Banking Bailout Law
A Comparative Study of the United States, United Kingdom and the
European Union
Virág Blazsek
Public-Private Partnerships in Emerging Economies
Augustine Edobor Arimoro
Regulation and the Global Financial Crisis
Impact, Regulatory Responses and Beyond
Daniel Cash and Robert Goddard
Discrimination, Vulnerable Consumers and Financial Inclusion
Fair Access to Financial Services and the Law
Edited by C t lin Gabriel St nescu and Asress Adimi Gikay
ăă ă
The European Sovereign Debt Crisis
Breaking the Vicious Circle between Sovereigns and Banks
Phoebus L. Athanassiou and Angelos T. Vouldis
For more information about this series, please visit: www.routledge.com/Routledge-
Research-in-Finance-and-Banking-Law/book-series/FINANCIALLAW
The European Sovereign
Debt Crisis
Breaking the Vicious Circle between
Sovereigns and Banks
Phoebus L. Athanassiou and
Angelos T. Vouldis
First published 2022
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
605 Third Avenue, New York, NY 10158
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2022 Phoebus L. Athanassiou and Angelos T. Vouldis
The right of Phoebus L. Athanassiou and Angelos T. Vouldis to be
identified as authors of this work has been asserted by them in accordance
with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Athanassiou, Phoebus, author. | Vouldis, Angelos T., author.
Title: The European sovereign debt crisis: breaking the vicious circle
between sovereigns and banks/Phoebus L. Athanassiou and Angelos T.
Vouldis.
Description: Abingdon, Oxon; New York, NY: Routledge, 2022. |
Series: Routledge research in banking and finance law |
Includes bibliographical references and index.
Identifiers: LCCN 2021006886 (print) | LCCN 2021006887 (ebook) |
ISBN 9780367523466 (hardback) | ISBN 9781032030555 (paperback) |
ISBN 9781003186434 (ebook)
Subjects: LCSH: Debts, Public–Law and legislation–European Union
countries.
Classification: LCC KJE7085.A84 2022 (print) | LCC KJE7085 (ebook) |
DDC 343.24/037–dc23
LC record available at https://lccn.loc.gov/2021006886
LC ebook record available at https://lccn.loc.gov/2021006887
ISBN: 978-0-367-52346-6 (hbk)
ISBN: 978-1-032-03055-5 (pbk)
ISBN: 978-1-003-18643-4 (ebk)
Typeset in Bembo
by Deanta Global Publishing Services, Chennai, India
Contents
List of main legal instruments and sources ix
List of cases xii
List of abbreviations and acronyms xv
Preface xviii
Introduction 1
1 The sovereign–banks nexus: An economic analysis 8
1.1 Introductory remarks 8
1.2 Brief historical overview 8
1.3 Why do banks hold domestic sovereign debt? 9
1.3.1 Discrimination and selective defaults 9
1.3.2 Pro-cyclicality of sovereign debt 11
1.3.3 Moral suasion and financial repression 14
1.3.4 Sovereign debt’s preferential regulatory treatment and use as
collateral 16
1.3.5 Concluding remarks 21
1.4 The sovereign–banks nexus 22
1.4.1 From sovereigns to banks 24
1.4.2 From banks to sovereigns 26
1.4.3 From banks to other banks and to other financial
institutions 28
1.4.4 From banks to the real economy (and vice versa) 30
1.4.5 From the real economy to the sovereign (and
vice versa) 35
1.4.6 Particular relevance for countries in a monetary union 38
1.4.7 Concluding remarks 41
vi Contents
2 Case studies from the European sovereign debt crisis 42
2.1 Effects of commercial bank crises on sovereigns 42
2.1.1 Introductory remarks 42
2.1.2 The case of Ireland 42
2.1.3 The case of Cyprus 45
2.1.4 Concluding remarks 46
2.2 Effects of sovereign crises on commercial banks 47
2.2.1 Introductory remarks 47
2.2.2 The case of Greece 50
2.2.3 The case of Cyprus 51
2.2.4 Conclusions 53
3 An economic analysis of policy options 55
3.1 Introductory remarks 55
3.2 Fiscal policy and why fiscal measures may not be sufficient 55
3.3 Closing the first channel of contagion from banks to sovereigns:
Is the European Banking Union an optimal policy response? 62
3.4 Closing the second channel of contagion from sovereigns to
banks 78
3.4.1 Revision of the regulatory treatment of sovereign debt
holdings and its challenges 78
3.4.2 Safe assets 86
3.4.3 Eurobonds 104
4 Closing the first channel of contagion from banks to
sovereigns: Hitherto European actions and their critique 120
4.1 Introductory remarks 120
4.2 The single supervisory mechanism: Overview of legal and
operational shortcomings and concerns 122
4.2.1 Operational set-up and related concerns 122
4.2.2 Other legal concerns and open questions 127
4.3 Bank recovery and resolution directive and the single resolution
mechanism: Overview and shortcomings 134
4.3.1 From the bank recovery and resolution directive to the single
resolution mechanism 134
4.3.2 Single resolution mechanism and single
resolution fund 135
Contents vii
4.3.3 R emaining challenges in the field of resolution 137
4.4 European deposit guarantee scheme: Overview and state
of play 140
4.5 Other institutional and legal concerns thrown up by the European
Banking Union 143
4.6 Centralisation of emergency liquidity assistance provision as a means
of closing the first channel of contagion? 145
4.7 Intermediate assessment: Does the European Banking Union break
the first channel of contagion? 147
5 Closing the second channel of contagion from sovereigns to
banks: Legal assessment of policy options 154
5.1 Introductory remarks 154
5.1.1 E x Ante measures: Limits on sovereign bond
holdings and/or change in their favourable regulatory
treatment 155
5.1.2 O ther policy options 159
5.2 A credible euro-area stability support mechanism: State of the
debate 159
5.2.1 T he European Stability Mechanism 159
5.2.2 F rom the European Stability Mechanism to a European
Monetary Fund? 167
5.2.2.1 Introductory remarks 167
5.2.2.2 Choice of institutional set-up: An
intergovernmental European Stability
Mechanism or a supranational European
Monetary Fund? 169
5.2.2.3 What powers for a credible European lender of
last resort? 175
5.2.2.4 Concluding remarks 180
5.3 Creation and issuance of a European safe asset: Eurobonds and
other proposals 181
5.3.1 E urobonds and other proposals 181
5.3.1.1 Overview of proposals 181
5.3.1.2 Legal assessment of existing proposals 184
5.3.1.3 The European Central Bank as
issuer of an alternative common safe asset? 193
5.3.1.4 Concluding remarks 195
viii Contents
5.3.2 A European Central Securities Depository for the issuance
of common safe assets? 196
5.3.2.1 Possible legal bases 197
5.3.2.2 Proportionality considerations 198
5.3.2.3 Subsidiarity considerations 199
5.3.2.4 Legal regime governing a European Central
Securities Depository and the instruments issued
through it 201
Concluding remarks 205
Bibliography 209
Index 228
Main legal instruments and sources
Treaty on European Union
Articles 3(4), 4(1), 5(2), 5(3), 5(4), 6(1), 13(1), 48(6)
Treaty establishing the European Community
Articles 230, 235
Treaty establishing the European Stability Mechanism
Recital (2)
Articles 4(3), 4(4), 11, 12(1), 12(3), 13(1), 15
Annex 1
Treaty on the Functioning of the European Union
Articles 4(2), 5, 50, 114, 115, 118, 120–123, 125, 126, 127(5), 127(6),
136, 143, 212, 263(1), 263(4), 277, 296, 311, 326–334, 340, 352
Article 8 of Protocol (No 2) on the application of the principles of subsidiarity and
proportionality
Article 3(3) of Protocol (No 4) on the Statute of the European System of Central
Banks and of the European Central Bank
Council Regulation (EU) 407/2010 of 11 May 2010 establishing a European
financial stabilisation mechanism [2010] OJ L118/1
Recital (7)
Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific
tasks on the European Central Bank concerning policies relating to the
prudential supervision of credit institutions [2013] OJ L287/63
Recitals (28), (30), (35), (37), (61)
Articles 1, 4(1), 4(3), 6(3), 6(4), 6(5)(a), 6(5)(b), 6(5)(c), 6(5)(e), 6(6), 6(7),
7, 9(1)(a), 10–15, 22
Decision ECB/2012/3 of the European Central Bank of 5 March 2012 on
the eligibility of marketable debt instruments issued or fully guaranteed
by the Hellenic Republic in the context of the Hellenic Republic’s debt
exchange offer [2012] OJ L77/19
Article 20
Decision ECB/2014/16 of the European Central Bank of 14 April
2014 concerning the establishment of an Administrative Board of Review
and its Operating Rules [2014] OJ L175/47
