Wednesday October 10, 2012
09:30 AM - 11:15 AM
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 1: Sovereign Risk, Capital Markets, and Financial Stability: The Interconnections

This session discussed the main spillover channels through which sovereign risk spreads into the financial sector and vice versa. It discussed adjustments needed to the existing financial stability toolkit to capture sovereign risk more systematically including from a macro-prudential policy perspective.

Key questions addressed included:

  • How has market dynamics changed during the crisis due to sovereign risk? What determines investor and market perceptions of the riskiness of sovereign debt?
  • How will changes in the new global capital and liquidity prudential frameworks, as well as ongoing shifts in global asset allocation strategies, affect sovereign financing strategies?
  • Through what channels (capital/trade/confidence) does sovereign risk spill over from one region to another?
  • What are the roles of central banks and fiscal authorities? What actions can they take to mitigate market stress stemming from sovereign risk? Is there need for a global safety net to mitigate sovereign risk?

This was the first of a two-part seminar on Fiscal Risk and Financial Stability. The second seminar was Session 2: Restoring Public Debt Sustainability in a High-Risk Environment

Opening Remarks:Toshiro Mutoh , Chairman, Daiwa Institute of Research, Japan

Panelist(s):Laurence Fink , Chairman and Chief Executive Officer, BlackRock, United States
Nobuyuki Hirano , President, Bank of Tokyo-Mitsubishi UFJ, Ltd., Japan
David Lipton , First Deputy Managing Director, International Monetary Fund
Christian Noyer , Governor, Bank of France
Janet Yellen , Vice Chair, Board of Governors of the Federal Reserve System, United States
Moderator(s):Martin Wolf , Chief Economics Commentator, Financial Times, United Kingdom

Organized by:Christopher Towe and Udaibir Das, Monetary and Capital Markets Department—International Monetary Fund; in collaboration with the Ministry of Finance, Japan