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The Consequence of the Market’s Responses

In: The Euro and International Financial Stability

Author

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  • Efthymios G. Tsionas

    (Athens University of Economics and Business)

Abstract

The selling of bonds from countries in distress, like Greece, put a strain on Greek resources to accommodate these transactions. The lower demand for Greek debt should decrease rates and the number of outstanding bonds. Since net supply decreased, there should be a net increase in rates and a further reduction in outstanding bonds. What happened then was further selling of bonds by the European Central Bank which would lower the bond rates if it were not for the fact that their demand was increased by the commercial banks: Eventually this restored, approximately, the previous equilibrium at almost the same bond rates! Clearly this policy did not help the payment of short-term obligations, which is why the European Central Bank resorted to the policy of “hair-cut” inspired by the Latin American debt crisis of the 1980s.

Suggested Citation

  • Efthymios G. Tsionas, 2014. "The Consequence of the Market’s Responses," Financial and Monetary Policy Studies, in: The Euro and International Financial Stability, edition 127, chapter 0, pages 215-217, Springer.
    • Handle: RePEc:spr:fimchp:978-3-319-01171-4_31
    DOI: 10.1007/978-3-319-01171-4_31
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