Let’s say that “Germany” guarantees bank deposits in Spain. But the guarantee cannot be unconditional. That is, if Spain leaves the euro anyway and redenominates its bank deposits into lower-valued pesetas, Germany will not make the Spanish bank depositors whole. For one thing the implicit liability is too large, for another Germany would be offering Spain a huge free lunch and relying too much on political pressure to stop subsidized exit from happening. For yet another thing you cannot reward those countries which totally break the basic rules.
So the guarantee is actually “we cover your bank deposits against many contingencies, except the one we all fear the most.”Read it at Marginal Revolution
Game theory and cross-border deposit guarantees
By Tyler Cowen
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