Bloomberg News

BIS Urges Europe to Fix Sovereign Debt Crisis ‘Once And for All’

June 26, 2011

June 26 (Bloomberg) -- The Bank for International Settlements urged Europe to end its dithering and find a permanent solution to the sovereign debt crisis.

“For well over a year, European policy makers have been scrambling to put together short-term fixes for the hardest-hit countries while debating how to design a viable and credible long-term solution,” the BIS said in its annual report published today in Basel, Switzerland. “They need to finish the job, once and for all.”

European officials have bickered over who should foot the bill for bailouts of Greece, Ireland and Portugal, prolonging a crisis that some analysts say could end in the demise of the euro. While European Union leaders last week agreed to a new aid program for Greece to stave off default, Germany is still trying to convince banks and insurers to participate by rolling over their maturing Greek debt.

The European Central Bank has warned that any solution deemed a default or “credit event” risks making the crisis worse.

“The fallout from a partial default on outstanding sovereign debt would be extremely difficult to control, especially given the losses banks might sustain,” the BIS said in its report. It noted the “eye-popping jumps” in bond yields of debt-riddled nations and said fiscal consolidation is paramount.

Sudden Punishment

Italian and Spanish bonds fell last week on speculation the debt crisis might worsen. The extra yield, or spread, that investors demand to hold Italian 10-year debt instead of German bunds of similar maturity widened to 213 basis points, a euro- era record. Greek two-year notes are yielding close to 30 percent.

“Governments that put off addressing their fiscal problems run a risk of being punished both suddenly and harshly,” the BIS said. “The fiscal challenge is made all the more difficult by the fact that simply returning to the pre-crisis fiscal stance will not be enough.”

The BIS, which acts as a central bank for the world’s central banks, said fiscal positions preceding the global financial crisis were “made to look unrealistically rosy” by tax revenues from unsustainable credit and asset-price booms.

“Cyclical surpluses need to be built up as buffers that can be used for stabilization in the future,” it said. “Since the government acts like an insurance company, it needs a reserve fund.”

--With assistance by Lukanyo Mnyanda in Edinburgh. Editors: Matthew Brockett, Alastair Reed

To contact the reporter on this story: Jeff Black in Frankfurt jblack25@bloomberg.net

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net


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