That is why financial reform will have to go hand in hand with fiscal reform. Fiscal reform will reinforce confidence. In the current situation, we have to – and we do – stand firm on these principles. Speculation on more and more elevated sovereign risk has been one factor behind spreads being driven to very high levels. This is why it was very important that the heads of state and government declared on 11 February 2010 that they were ready to “take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole”. I said, on behalf of the ECB, that I approved of this important statement. In this respect let me stress the following: Loans are not transfers, and loans come at a cost. They come not only at a financial cost; they also come with a strict conditionality. This conditionality needs to give assurance to lenders, not only that they will be repaid but also that the borrower will be able to stand on its own feet over a multi-year horizon. In the case of Greece, this will require courageous, recognisable and specific actions by the Greek government that will lastingly and credibly consolidate the public budget. Other countries in the Union and elsewhere have gone through times that were no less difficult, and they have emerged from a determined adjustment stronger and more competitive than in the past. These countries have demonstrated that a clear U-turn in national policy governance is achievable.
This was perhaps the response to rising income inequality, as emphasized by Rajan (2010), and the lack of other policies to correct this problem in a fast and efficient way. Ironically, the crisis affected more intensely precisely those that were supposed to benefit from “financial inclusion.” There are many other cases in which well intentioned developments are implemented through weak policies. Take the case of interest rate ceilings. In order to promote fairness, many countries introduce limits on the interest rate on loans. This policy attempts principally to protect people with disadvantages and allow them to participate in the financial system. If this ceiling is set low enough, it may end up generating exclusion rather than lower financial costs for households, who may end up paying much higher interest rates in informal credit markets. This is not the place to analyze all the causes and culprits of the crisis, but it is worth discussing certain aspects that are frequently singled out by the general public. First and foremost, the crisis was caused by the irresponsible behavior of the financial industry. The structure of incentives was unsuitable. It led to excessive risk-taking without proper risk management. Compensation was heavily biased towards deal-making, regardless of the quality of the deals. Commissions and fees were a very important component of the compensation scheme. In the end, all that mattered was granting credit indiscriminately, maximizing packaging and selling securities, etc. This was at the foundation of the originate-and-distribute model of financial services, and served to increase leverage to unsustainable levels.