Analysis Of Lender Of Last Resort Relief Mechanism In The European Sovereign Debt Crisis

In the end of2009, three major international rating agencies lowered Greece’ssovereign credit rating in succession which led to the sovereign debt crisis andevolved into the European debt crisis. The ongoing of the crisis generated a systemicrisk within the whole European Union which made the bailout of lender of last resort(LLR) become necessary. In September and October,2012, the Outright MonetaryTransactions (OMT) of the European Central Bank and the European StabilityMechanism (ESM) of the European Union was proclaimed. The joint of ECB andESM may become the cornerstone of the European debt crisis assistance system.This thesis starts with the theory of lender of last resort. Thornton and Bagehot’sideas form the core of the classic theory of lender of last resort and provide theprinciple of lender of last resort which is Badgett Principle. Then the contemporarytheory of lender of last resort which formed from the20thcentury deepens the regimestudy of lender of last resort from different perspectives and adapts the theoreticalfoundation of lender of last resort regime to the modern financial environment.Moreover, the theory of lender of last resort maintains its own new developmentduring the European debt crisis. First of all, the main body of implementation hasexpanded which means ECB, EU and IMF act as the role of lender of last resort tovarying degrees. Secondly, the means of implementation maintains its innovationwhich includes unconventional monetary policies performed by ECB and relief fundformed by the EU.The foothold of this thesis is the relief practice of lender of last resort during theEuropean debt crisis. Therefore on the basic of evaluation and carding of the reliefmeasures made by ECB and EU, this thesis believes that these measures make debtornations and financial institutions more flexible and stabilize market confidence. Inaddition, these relief measures lower the treasury risk premiums of debtor nations andrestrain the spread of the crisis. Surely, these measures have to face the risk of moralproblems, but the strict execution conditions of OMT and the ESM well play the roleof a guard against moral hazard.At last, the study of relief mechanism of lender of last resort during the Europeandebt crisis provides enlightenment for the formulation and improvement of the lenderof last resort system in our country. Compared with the robust financial market ofdeveloped countries, China’s financial sector is still in its early stages of development.Under this circumstances, there are more chances for financial market to reveal itsvulnerability. Hence, in order to maintain the safety of financial lifeline, stability ofeconomic development and the enhancement of competitiveness, it is necessary for usto learn the lesson of the Europe to build up and improve the lender of last resortsystem and its supporting measures.