Deficit countries will see falling domestic demand and rising household savings rates, while surplus countries face a decline in exports. A first indication for the process of rebalancing is declining credit growth in those countries that had enjoyed buoyant credit markets in recent years (Fig 11). At the same time, current projections see little movement in real exchange rates.
Take the regulatory treatment of government bonds as an example. Unlike for all other forms of credit, banks do not have to hold capital against government bonds in line with the risks that they carry, and this inconsistency has dangerous side-effects. Since the euro-area sovereign debt crisis – if not before – it has become clear that government bonds are anything but risk-free.