Global sovereign debt risk is too much trouble

Global sovereign debt risk is too much trouble Risks to sovereign debt in Europe and beyond pose the top problem for the global financial system, and banks, governments and central banks must prepare for a sustained period of volatility, top officials from the Canadian and Italian central banks said. "Sovereign risk has emerged as the main challenge to global financial stability," Bank of Canada Gov. Mark Carney and Bank of Italy Managing Director Fabio Panetta wrote in a commentary posted Monday on the Financial Times website. "This issue is not limited to Europe," they said. "With high and rising debt levels in most advanced economies, the risk-free status of sovereign debt is now in question." Carney is chairman of the Bank for International Settlement's Committee on the Global Financial System, and Panetta chaired a study group of the committee on sovereign-credit risk. They wrote that worsening sovereign creditworthiness hurts banks but that "actions by banks and the official sector can mitigate these effects." Banks should diversify their government-debt holdings, increase their capital and find stable funding sources, Carney and Panetta wrote. Governments, they said, must "step up efforts to return public finances to more solid long-term paths," and regulators must look at policies that encourage banks to hold large quantities of public debt, while ensuring maximum transparency of these holdings.