Sharon Bowles MEP said: "The dilemma is that to prevent moral hazard there must be some 'pain' associated with the interest rates, but this also makes it harder for the borrowing country to achieve or sustain recovery."
"The 'pain', higher rates, at least on the open market, is a measure of how much risk is perceived of there being a default. The problem is that then if there is no default the borrowing country has effectively 'overpaid' and the provider of funds has had a windfall."
"Within the EU self-help systems we should be acting as fellow Member States and not like investment banks - there should be a broader element of solidarity rather than simple market rules. Therefore, I am suggesting that this windfall money should be returned to the borrower at the end of the loan, in effect as a good behaviour bonus. In the interim it should be retained as a guarantee for use in the event of default. This means that as far as the Stabilisation Mechanism is concerned, which is funded by the EU budget, the 2% - 3% windfall is not returned to Member States collectively but retained then returned to the borrowing country if there is no default."
"Likewise, in the Stability Facility the windfall is retained to back the guarantee of the contributing Member States, but once that element of the guarantee has been repaid the windfall should go back to the borrowing country. Moral hazard is addressed because the borrowing country still has to face the immediate 'pain' of paying high interest rates but there is both a carrot and actual help to sustainability in the potential refund of part of the interest paid. It is also likely that the markets would take account of the likely, or otherwise, return of the windfall, adding yet another element of discipline."
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