A passive fiscal policy means that the fiscal authority must be ready and willing to adjust its policy stance (revenues and primary spending) in such a way as to stabilise its debt at any level of the interest rate that the central bank may choose. Or, to put it another way, borrowing from Woodford’s terminology, 8 fiscal policy needs to be “Ricardian”. 9 Although the Treaty shows an awareness of the need for consistency between monetary and fiscal policy, in the sense described above, to ensure lasting stability, it did not foresee that fiscal policy could go off track to an extent that requires dedicated institutions and policies able to provide financial assistance, against conditionality, in order to restore sustainability and preserve financial stability in the euro area. The creation of the EFSF/ESM in charge of providing support to euro area Member States in difficulties and enforcing appropriate conditionality has filled this gap. It provides the euro area with a means to restore “Ricardianess”, thereby minimising the risk of “fiscal dominance”. Against this background, it is easy to understand the ECB’s decision on 6 September to undertake Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area, and to understand the specific framework within which they will be implemented. The aim of OMTs is to preserve the singleness of monetary policy and to ensure the proper transmission of the monetary policy stance to the real economy throughout the euro area.

There has been a worldwide wave of consolidation among financial institutions, stock and derivative exchanges, and even regulatory bodies. In 1999, there were 900 merger-and-acquisition (M&A) transactions among banks, worth $ 300 billion worldwide.2 The securities industry has been no less active, with exchanges and clearinghouses in a flurry of mergers and alliances. While globalisation and integration are established features of capital markets, two more recent trends are noteworthy: firstly, stronger linkages between capital market and treasury activities, and secondly, the impact of technology and the internet on capital markets, particularly in the securities industry. MAS’ guidelines on treatment of credit derivatives and securitisation The links between capital market and treasury activities reflect an increase in cross-border transactions. In the US and Europe, the spate of mergers and acquisitions has boosted the volume of foreign exchange flows. The mergers have also led to greater use of securitisation and credit derivatives, and caused European credit derivative markets to expand significantly.3 1 2 3  1999 Survey of the Singapore corporate debt market. “European banking turns decisive corner on road to consolidation”, International Wealth Management, July 2000. “Use of credit derivatives in bank mergers soars”, International Financing Review, March 2000. 1  BIS Review 69/2000  In Singapore, the burgeoning capital market has similarly benefited our treasury industry. Increased debt issuance has led to more swaps and other money market activities. Participants are using more sophisticated treasury and capital market products. We must keep our regulatory framework up-to-date, so that it provides clarity, and allows growth and innovation.