Bundesbank President Jens Weidmann said on Friday that a European solution may be required for the regulatory treatment of sovereign debt, if the ongoing discussions by the Basel Committee fail to produce an agreement.
“In contrast to other jurisdictions, the Eurosystem is for good reasons forbidden to act as lender of last resort for governments,” Weidmann said at a conference in Frankfurt. “The risk profile of euro-area sovereign debt is therefore different.”
Pointing to the need to end the preferential treatment of sovereign debt, Weidmann said sovereign debt is not risk-free and must be backed by capital. Further, he said the “exposure to a single sovereign must be capped, just as is the case for any private debtor”.
“Doing away with the preferential tax treatment of debt could therefore provide a major boon for financial stability,” Weidmann said.
While too much debt can be dangerous, it is equally true that debt is indispensable, the policymaker said.
“In the euro area we are already in the danger zone – at least with regard to public debt standing at 91% and corporate debt at 105%,” he pointed out.
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