BIS Review 119/2007  3  Moreover, precautionary savings may be compounded in emerging economies that are characterised by greater macroeconomic instability. In addition, when the private sector has limited access to credit, agents have to rely on self-financing, whether for household purchases of durable goods or for corporate sector investment. What are the underlying mechanisms that cause these private savings to end up in public balance sheets? Such a substitution of public savings for private savings in emerging countries results from the interaction of two basic ingredients: incomplete financial markets and inflexible exchange rate regimes. Beyond credit constraints, a key feature of financial market incompleteness in emerging economies is the lack of domestic financial assets, such as fixed-income securities. As a consequence, a large share of these savings ends up in bank deposits. The other key ingredient is of course the exchange rate regime. In many emerging economies, trade surpluses reflect net foreign currency revenues. Capital account regulations sometimes involve surrender requirements of such currency-denominated income but more importantly, in a fixed or a pegged exchange rate regime, the central bank purchases foreign currency to prevent appreciation. The capital account regime and financial constraints of developing economies result in the central bank “borrowing” from the private sector as a domestic counterpart to the hoarding of international reserves. Banks naturally play a central intermediation role in this mechanism by taking deposits of private savings and purchasing sterilisation bills. That completes the mechanism of excess private savings being diverted into public holding of excess reserves.

As I have said from the start, public debt may not be able to play that role to the same extent as before. The ultimate safe asset, therefore, will be the currency itself. Markets and lenders will trust those currencies that, whatever the circumstances, are managed with one overriding priority: preserving price stability and the intrinsic value of the currency unit. On this fundamental basis, we can look at the future of the euro with strong and realistic optimism. I see the  BIS central bankers’ speeches  3  recent decision by the Swiss central bank to peg the CHF to the euro as a confirmation of this statement. A few words on the banking sector, and, of course, French banks. I would remark, first, that banks have been hit in all advanced economies by the downward revision of growth prospects. Since August, CDS premia on major banks and BOR-OIS spreads have risen in all regions, although to a larger extent in Europe, displaying everywhere a sharp rise of counterparty risk. By the same token, banks’ share prices fell in all major economies, with French banks being particularly hit. This overreaction of share prices can be explained by a simple amplification mechanism: slower growth means lower profits, thus lower projected dividends. At the same time, banks are required to build additional capital buffers, which further constrain their pay-out ratio. So dividend prospects are doubly affected and that explains why, in the current period, share prices are reacting so strongly to negative news on growth.