No Backstop, No Immediate Answers for Sovereign Debt Woes

Editor's Note: On Monday, Paul Jackson, the publisher of HousingWire, postulated the market sentiment that we are all in this mess togetherTwo days ago, in one of his rare appearances in front of the press, Bank of England Governor Mervyn King spoke frankly to reporters over the results of his Quarterly Inflation Report.

King's observations, in many ways, provide a timely parallel to Jackson's remarks. The following excerpts are from that conference, largely overlooked by the American press, where King lays it out cold for us. Here's why they don't let him out too often:

As you know international conversations proceed very slowly – too slowly usually.

In 2008 there was an exception.

I think the mood and manner of the G7 meetings at the IMF in October 2008 was very different, and that people did come together and recognize that, unless they worked together, we would all be facing an extraordinarily serious position.

That's pretty well documented in [former US Treasury Secretary] Hank Paulson's memoirs of the period.

But I think what I heard on the telephone conversations that I was part of at the weekend, it was slightly reminiscent of that: a recognition that the problems are far too serious for countries not to work together.

After all, dealing with a banking crisis was difficult enough, but at least there were public sector balance sheets onto which the problems could be moved.

Once you move into the sphere of concerns about sovereign debt, there is no answer; there's no backstop.

And it is very important therefore that we hit these problems on the head now, put in place credible solutions to prevent the problems becoming worse.

And I detected at the weekend, in the conversations that I spent hours listening to on the telephone, that this sense of the need to work together was there again.

Now that's not the same as coming up with measures – individual countries have to produce fiscal measures. Spain has announced this morning some further fiscal measures.

I think you will see in the next few weeks determined action by governments to try to deal with this problem.

I think at the weekend the Americans, and indeed the IMF, played a very constructive role in bringing countries together to put in place the measures that were necessary. But it's a much harder set of issues now.

It's to do with individual fiscal consolidation, and it's also to do with the need to try to work together through the IMF and G20 in our process.

That's been the framework that's been agreed in principle, to ensure that countries that do have the ability to expand domestic demand are encouraged to do so, to enable those countries that need to regain competitiveness to have the opportunity to increase their exports to those countries that previously had large current account surpluses, so that we can rebalance demand in the world economy.

And that will be, I think, the big question for the international agenda over the rest of this year.

But let's be clear: this is an issue not just for the United Kingdom.

Every country around the world is in a similar position, even the United States; the world's largest economy has a very large fiscal deficit. And one of the concerns in financial markets is clearly – how will this enormous stock of public debt be reduced over the next few years?

And it's very important that governments, both here and elsewhere, get to grips with this problem, have a very clear and credible approach to reducing the size of those deficits over, in our case, the lifetime of this parliament, in order to convince markets that they should be willing to continue to finance the very large sums of money that will be needed to be raised from financial markets over the next few years, at reasonable interest rates.

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