Without a Lender of Last Resort for government debt, multiple equilibria in bond markets may ensue where default emerges for non-fundamental reasons. The stabilising power of central bank interventions does not build on a real debt depreciation via inflation, but on a swap of bonds and central bank reserves that bear lower interest rates. Budget constraints and balance sheet considerations do not necessarily pose severe restrictions for such a monetary backstop policy. However in EMU, the ECB is not authorised for supporting national fiscal policy. But a return to a no-bailout regime requires large debt cuts.
currency union lender of last resort central bank reserves central bank budget constraint