However, the macroeconomic effects of such new rules would no doubt be positive. Financial stability would be enhanced, incentives to pursue this type of fiscal policy would be increased and lending to private borrowers would become more attractive which, in turn, might boost capital stock and economies’ growth potential. It would therefore be important not to lose any time.
This article should be seen as a contribution to this debate. Against this backdrop, it is a welcome development that the Basel Committee has now added the regulatory treatment of lending to sovereigns to its agenda. Furthermore, the European Systemic Risk Board published its report on this topic just the day before yesterday.