Annunziata says policy makers’ mixed signals are fueling volatility in sovereign-debt markets. EU leaders have two choices. They can accept that whenever a member country is in trouble it will be rescued without a debt restructuring, in which case they should impose tight and enforceable fiscal rules to keep members in line and avoid moral hazard. Or they can adopt a sovereign-debt restructuring mechanism and let markets play their disciplining role by pricing sovereign-credit risk in an environment of greater transparency and predictability. Postponing this choice will keep the pressure high on countries like Greece, requiring ever stronger efforts to improve fiscal balances and bolster potential growth. It will also delay the repricing of sovereign risk that is an essential component of the sought-after stabilization in financial markets.
Annunziata is chief economist at UniCredit.