However, if the debt rescheduling causes losses on loans held by European banks, it weakens the private banking system, which then puts pressure on the central bank to come to the aid of those banks. Private-sector bond holders are an integral part of the public and private banking system. Another possible response is for wealthy member countries to guarantee or purchase the debt of countries that have defaulted or are likely to default. This alternative requires that the tax revenues and credit of the wealthy member countries be used to refinance the previous borrowing of the weaker member countries, and is politically controversial. COUNT 5
QSN1 What would cause the private banking system to weaken? ANS1 if the debt rescheduling causes losses on loans held by European banks QSN2 Who purchases the debt of countries that cannot repay and are in danger of default? ANS2 wealthy member countries QSN3 What happens when the private banking system is weakened? ANS3 pressure on the central bank to come to the aid of those banks QSN4 What is to be used to guarantee the debtors repayment, by the banks assuming their debt? ANS4 tax revenues and credit of the wealthy member countries QSN5 Is using the tax revenues and credit of the more stable banks to bail out the ones in danger of default an accepted practice? ANS5 is politically controversial