Claudia Buch: Covid-related fiscal measures and debt sustainability

Speech by Prof Claudia Buch, Vice-President of the Deutsche Bundesbank, at the ESM seminar on debt sustainability Panel II "Policy implications in the 'new normal'", virtual, 20 April 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

1 The pandemic has been a stress test for the global financial system

The coronavirus pandemic has been the biggest stress test for the global financial system in recent decades. It was unexpected, it has been truly global, and it has differed in scale and scope from the global financial crisis in 2008. In the global financial crisis, excessive leverage in the banking sector led to contagion and a financial crisis that impaired the functioning of the financial system. The coronavirus pandemic, in contrast, threatens the liquidity and solvency of the corporate sector.

So far, the financial system has weathered the storm and continued to function – because policy coordination has worked well during this crisis. Fiscal and monetary policy responses have been bold and timely. The financial system has proven to be robust: Thanks to the G20 regulatory reforms following the global financial crisis, the banking system is better capitalized, and there is greater regulatory flexibility to reduce pro-cyclicality. Policy responses have been coordinated internationally.

However, key challenges for debt sustainability and financial stability may still lie ahead. Dealing with increasing insolvencies, maintaining crisis-related policy support only as long as necessary, and ensuring financial sector resilience will be among the policy priorities going forward. There is still a high degree of uncertainty concerning the future evolution of the pandemic and the damage that has been done to the real economy. One cannot rule out an adverse scenario with feedback loops to the real economy if banks deleverage to meet capital requirements imposed by regulators or markets. Hence, monitoring the interaction between debt sustainability in the public sector, the corporate sector, and the banking sector will be crucial.