Wednesday October 10, 2012
11:30 AM - 01:00 PM
Hotel Okura Heian

Fiscal Risk And Financial Stability:
Managing Interdependencies And Sovereign Risk

The global economy and financial markets are facing unprecedented uncertainty. Public debt levels are high and rising while financial stability remains at risk. The advanced economies - particularly in Europe - remain at the epicenter of many of these macro-financial pressures. Emerging economies are not immune and are bracing to combat the fallout of crises elsewhere. The lesson of recent years is how closely intertwined fiscal and financial stability are, how easily contagion and adverse spillovers can spread across borders and within regions, and how quickly the ability of governments to access capital markets for debt financing can be impaired. This has led to heightened attention to "sovereign risk" from governments and financial markets and recognition of the need for pre-emptive policies to ensure confidence in sustainability of public debt policies. This seminar thus seeked to discuss fiscal-financial interdependencies and their policy and capital market implications, and how best should conventional fiscal and monetary policies be augmented to manage sovereign risk.

Session 2: Restoring Public Debt Sustainability in a High-Risk Environment

This session discussed policies to restore long-term debt sustainability when financial sector vulnerabilities remain high.

Key questions included:
  • What is the appropriate pace and composition of fiscal adjustment that can restore investor confidence without undermining growth and financial system soundness?
  • How fast should support to the financial sector be unwound, and what backstopping arrangements should replace it, if any?
  • How should social security and other structural challenges be addressed to contain entitlement spending, supporting long-term fiscal adjustment efforts?
  • What lessons can be learned from recent institutional arrangements such as fiscal rules to lock in fiscal reforms and increase confidence?

This was the second session in a two-part seminar "Fiscal Risk and Financial Stability: Managing Interdependencies and Sovereign Risk". The preceding session was Session 1: Sovereign Risk, Capital Markets, and Financial Stability: The Interconnections.

Panelist(s):Vítor Constâncio , Vice President, European Central Bank
Takehiko Nakao , Vice Minister of Finance for International Affairs, Japan
Peter Orszag , Vice Chairman, Global Banking, Citigroup, United States
Jean Pisani-Ferry , Director, Bruegel Institute, Belgium and Professor, University of Paris-Dauphine, France
Nemat Shafik , Deputy Managing Director, International Monetary Fund
Ignazio Visco , Governor, Bank of Italy
Moderator(s):Zanny Minton-Beddoes , Economics Editor, The Economist, United States

Organized by:Sanjeev Gupta and Jimmy McHugh, Fiscal Affairs Department - International Monetary Fund; in collaboration with the Ministry of Finance, Japan