When financial markets collapsed in autumn 2008, the authorities had to intervene. Bail-out packages for banks shifted debt from private to public hands. Governments increased spending to curb the fall in activity. But Keynesian policy – increased spending in order to stimulate demand during a downturn – requires a willingness to exercise fiscal restraint during an upturn. Many countries already had large budget deficits and high debt before the crisis, despite many years of prosperity. 2  BIS central bankers’ speeches  Limited growth capacity in the private sector also came into evidence when some countries could no longer stay afloat on borrowed funds. Good times turned into bad, with the need for crisis-related measures. The burden became heavy to bear. Many countries are now struggling to rein in large deficits and rising government debt. Structural reforms are being implemented in Europe. Pension rules are being tightened and tax systems are under review. The cost of such reforms would have been lower in good times. Chart 3  A lack of fiscal discipline is not the only factor behind the relatively high interest burdens facing Greece, Portugal, Spain and Italy. Public deficits rose in tandem with a fall in private saving. Countries lived beyond their means and accumulated current account deficits and substantial debt while their debt-servicing capacity weakened. The result is a deterioration in their creditworthiness.
Moreover, risks that operators seem to be managing well individually may prove to be a considerable strain on the financial system as a whole. As a response to this, a new macroprudential surveillance framework is now in the making. 4  BIS central bankers’ speeches  Norway, which is in a surplus and net asset position, faces some particular challenges. As investor and manager of the Government Pension Fund Global, we have seen that prices and yields can react strongly to uncertainty about the future. New steps in the management of financial wealth Norway invests a large proportion of its petroleum revenues in international equity, bond and real estate markets via the Government Pension Fund Global. The fund is fully integrated with the government budget, and the same priorities are imposed on spending from the Fund as on any other government spending. Today, the value of the Fund is around NOK 3.5 trillion, or about 170 percent of mainland GDP. Chart 5  The Fund should be invested with a view to maximising future purchasing power. At the same time, investments must be diversified in order to reduce the risk of losses also during periods when markets are shrouded in fear and uncertainty. BIS central bankers’ speeches  5  Chart 6  The world’s economic geography is changing. While growth in advanced economies has been weak and is slowing, growth is robust in Latin America and Asia. Several countries in Africa are now catching up. The Fund has considerable ownership interests in Europe.