July 14, 2011
The Bank of International (BIS), the central bank of central banks, published a 52-page report this week on a topical subject: the impact of sovereign credit risk on bank funding. The report describes in some detail the symbiotic relationship that exists between governments and banks, and shows how it can turn destructive in periods of financial stress. To avoid that, the authors put forward several recommendations, including this one:
In the current climate, advanced country governments should try to move as quickly as reasonably possible to implement credible strategies to stabilise or reduce their debt levels. This is key to anchoring market views about sovereign risk and avoiding negative spillovers on banks.
Not, a surprising recommendation, though there are good questions concerning just what "reasonably possible" entails. Greece has made dramatic budget cuts in an effort to convince markets to trust its debt, but these cuts have neither had the desired impact on fiscal balances or reassured markets—and Greece's leaders are warning that the cuts aren't sustainable. In America, leaders are working diligently on a fiscal consolidation deal, despite indications that short-term cuts in America could be counterproductive. Even as the pendulum swings toward austerity, there are big uncertainties surrounding which sovereign-debt instruments can be trusted and which can't.
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Read the Report
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