##down of the real economy. but such a rescue can place a huge burden on government finances – and no country knows that better than ireland, where support for the financial sector was a major factor why the debt ratio soared from 25 % of gdp in 2007 to 108 % in 2011. conversely, weak government finances can destabilise banks – directly through their exposure to sovereign bonds, and, indirectly, through worsening macroeconomic conditions. that is what we are also witnessing at this very moment. thus, breaking the link between banks and sovereigns is vital for making the euro area more stable. a banking union can very well be a major step in that direction – but by harnessing the disciplinary forces of the market, not by doing away with them. core elements of a banking union therefore have to be : first, a comprehensive bail - in of bank creditors, and second, an appropriate risk - weighting of sovereign bonds. in order to minimise the risk that bank rescues pose to government finances, creditors have to be the first in line when it comes to bearing banks ’ losses. implicit guarantees have to be removed as taxpayers ’ money can only be the last resort. by the same token, sovereign bonds need to be risk - weighted appropriately when it comes to the adequacy of capital buffers. riskier bonds have to become more expensive in terms of the amount of equity that they tie down, as is already the case for non - sovereign bonds. this serves two purposes : on the one hand, surcharges of this kind should translate into lower demand and, hence, into larger spreads, which gives a disciplining signal to the respective sovereign. and, on the other hand, banks would become more resilient in the event of market turmoil. bis central bankers ’ speeches adequate risk - weighting of sovereign bonds helps to prevent fiscal difficulties from translating directly into financial instability. if fiscal autonomy remains with national member states, which is still the status quo in the eu treaties, this is crucial. banks have to internalise the fiscal position of sovereigns in a similar manner as they take into account the risk of corporate bonds or loans. otherwise, the envisaged recapitalisation of banks via european funds could turn out to be a backdoor for mutualising sovereign solvency risks. i therefore believe that these two regulatory reforms – a comprehensive bail - in of creditors as well as an adequate risk - weighting of sovereign bonds – need to complement the envis

zinc, and for 30 per cent of world consumption growth in oil. due to its rapid growth and rising share in the world economy, china is expected to retain its critical role in driving commodity price movements. the recent increase in food prices has been the result of a number of factors including a weaker us dollar, the impact of higher energy and fertiliser prices, crop - specific supply shortfalls and droughts, and low inventory levels. some analysts suggest that higher global real incomes have also contributed to the upward pressure on food prices. an increasingly important driver of agricultural prices comes from the strong demand for bio - fuels, which has seen the diversion of agricultural output to energy production. although a number of countries have made significant strides in bio - fuels production, the united states and brazil together account for more than 70 per cent of worldwide production of ethanol. 5. the commodity price boom and the markets in recent years, investor interest in commodities has increased in line with the rise in commodity prices and increased global liquidity. trade in commodity indices, which total approximately us $ 100 billion has increased by a factor of 20 in the past decade. this is still relatively small compared to other asset classes but there has been a proliferation and diversification of the investor base including hedge funds and asset managers who have seen commodities as a means to diversify portfolio risk and take advantage of the high yields that have been achieved. significantly, investors are increasingly viewing commodities as a long - term investment. the financialisation of commodities has also been boosted by developments in financial engineering, with strong growth underlying contracts and investment strategies. expectations of continued and sustained growth in asia, particularly in india and china, have served to fuel the increased demand for commodity asset classes. a deeper and diversified market can bring benefits in terms of market efficiency. for example the fact that it is easier to hedge future production reduces the risk of new productive investment which may otherwise take some time to come on stream. a related issue concerns the role of speculators who are regarded by some as being responsible for price volatility in the market. recent evidence, however, suggests that this may not necessarily be the case. a recent study conducted by the chicago futures trading commission showed that speculative traders were not leading but rather responding to market developments. this suggests that speculators have tended rather to stabilise the market. developments in the financialisation of commodity markets may, however, raise several financial stability questions for central banks and financial sector regulators. in particular,