Policies on sovereign debt

This paper seeks to convey four main messages. Because sovereign debt in advanced countries has reached unprecedented levels, there is more uncertainty than before on its future dynamics, and its impact on growth. As with any debt, it also creates the potential for increased financial fragility. However, uncertainty does not translate into unsustainability. A “yes or no” approach to the question of sustainability will only lead to misapprehension and mistakes. In most cases, sustainability is fully endogenous to the set of policies implemented by governments themselves. Policy frameworks, therefore, are even more important than before to anchor expectations and ensure financial and monetary stability. There should be no doubt or ambiguity about the willingness of the governments of advanced countries to pay their debts. And nor should there be any ambiguity on the preservation of monetary policies aimed at price stability. Clarity of purpose is especially important when central banks are still implementing exceptional non-standard measures and taking broader responsibility for fi nancial stability. Finally, there is an international dimension to public debt sustainability. Improving the international financial architecture will help the world reach a high growth equilibrium despite asymmetries in public debt levels and financial development. This should be a major priority on the international agenda.