Restoring fiscal sustainability

24 June 2012

Sovereigns under fiscal pressure have been losing their risk-free status - and the accompanying economic benefits - at an alarming rate. The broad availability of safe assets aids the operation of financial markets and the conduct of monetary policy. And a sovereign whose debt is essentially free of credit risk has ample room to implement countercyclical policies to support macroeconomic stability. Restoring the supply of risk-free assets requires that governments convincingly address high deficits as well as projected increases in their long-term liabilities. Some countries need to take immediate action to significantly reform their public sectors and remove structural impediments to growth. All countries need to prevent adverse feedback loops between the financial sector and the sovereign and build up fiscal buffers in good times.