ANKARA
A European solution is needed for the management of sovereign debt, Bundesbank President Jens Weidmann said on Friday.
In a speech at the German central bank’s conference in Frankfurt, Weidmann warned that sovereign debt needs to be backed by capital, and exposure to a single sovereign must be capped, just as is the case for any private debtor.
There has never been regulatory oversight for sovereign debt. It is currently being discussed by the Bank for International Settlements in the context of the Basel III regulations, which are intended to beef up monitoring of banking credit in the wake of the financial crisis of 2008 to 2009.
While Weidmann did not mention Greece, the current negotiations for the country’s bailout provide an example of sovereign debt which became a danger to the nation incurring it, and to its creditors.
“Too much debt can be dangerous. But it remains equally true that debt is indispensable,” Weidmann pointed out.
The Bundesbank president proposed that the European Union take action to regulate sovereign debt.
“I welcome that the regulatory treatment of sovereign debt is now being discussed by the Basel Committee. But if these discussions fail to produce an agreement, we need to move forward with a European solution. In contrast to other jurisdictions, the Eurosystem is for good reasons forbidden to act as lender of last resort for governments. The risk profile of euro-area sovereign debt is therefore different.”
"Debt is a two-edged sword. Used wisely and in moderation, it clearly improves welfare. But, when it is used imprudently and in excess, the result can be disaster."
