It doesn't seem like the mechanism is what people are worrying about. It depends on whether the illiquidity is just a temporary thing or if it represents debt that will never be paid. If 2% of the GDP is fake/unresolvable debt, that's a huge, huge problem.
If it's a constant stock, sure there could be a sudden loss in confidence. But if the stock is constantly turning over due to existing certificates reaching term, others changing hands at increasing discounts, and new ones being issued, then perhaps no party risks a sudden, large loss.
Well, that's the question, isn't it. If it's truly steady state, then it works. But in practice, firms that miss one payment tend to miss the next too. This kind of debt arbitrage (and other related tricks like payday loans and collections agencies) tends to only work when it's a one-off kind of thing, or if the entities are so small that the overall risk to the system is low.
The contention here is that a whole economy is filled with this, to the tune of 2% of GDP! I mean, I don't know whether or not this is solvent but if it were my economy I'd be awfully worried.
