Keynote speech by Christian Noyer, Governor of Banque de France
TOKYO - October 3rd 2011
"...Overall, doubts have been cast on the ability of major advanced countries to pay back their sovereign debt. In different ways, to differing degrees and with opposite consequences, the same question is now being asked on both sides of the Atlantic: what kind of risk is attached
to sovereign debt? We used to think of public debt in major countries as a riskless asset. Not anymore, not to the same extent. In that sense, a true regime change has occurred, with deep and long-lasting consequences, upon which I will try and reflect today...."
"Over the last 70 years, financial markets have developed on a strong, albeit implicit, assumption. Public debt in advanced economies was considered risk free. On that basis, it was possible to build a whole architecture of asset prices, whose relative riskiness is determined according to the intrinsic characteristics of assets and investors' risk appetite. The important word here is "relative". To price financial assets, markets need a basis - a risk free rate. That basis has now been shaken."
"...Will our virtue be rewarded at the end? I believe so and, to explain why, I need to take a longer-term perspective. In the next decade, the world will be divided into two: on the one hand, advanced economies, with high absorption capacity, low savings and high debt with ratios between 85% and 100%; and, on the other, emerging economies, with high savings, low debt (around 30% GDP on average) and less absorption capacity. Our common prosperity will therefore depend on our ability to create stable channels and mechanisms of financial intermediation between those two parts of the world. That, in turn, will crucially depend on the existence of assets that can be considered safe stores of value. As I have said from the start, public debt may not be able to play that role to the same extent as before. The ultimate safe asset, therefore, will be the currency itself. Markets and lenders will trust those currencies that, whatever the circumstances, are managed with one overriding priority: preserving price stability and the intrinsic value of the currency unit. On this fundamental basis, we can look at the future of the euro with strong and realistic optimism. I see the recent decision by the Swiss central bank to peg the CHF to the euro as a confirmation of this statement...."