for other european sovereigns. a challenging question is now being asked : over the last 50 years, financial markets have developed on the assumption that public debt was considered risk free. the certainty that debt would be paid in full strongly anchored market views. now that this certainty is questioned, debt sustainability may rest on a more fragile and volatile basis. no immediate consequences have been felt so far in the us debt market which remains the most liquid one and the ultimate benchmark for assessing risk. however, a pervasive uncertainty has been created, which might be responsible for the decline in confidence that has occurred over the last weeks. in europe, on the contrary, sovereign credit risk has had immediate and dramatic consequences. it is difficult to foresee how, in the longer run, markets will assess debt sustainability. bis central bankers ’ speeches but let me challenge some current analyses about debt sustainability in europe. – first competitiveness. in the uk, for instance, the effective real exchange rate has depreciated by 23 % over the last four years and its exports have grown by a healthy 15 %, year - to - year over the first semester of 2011. but italy, spain and greece have done better, with exports growing respectively by 16 %, 19 % and 37 % over the same period, with, of course, no internal exchange rate adjustment. linking competitiveness with exchange rate depreciation is therefore too simplistic. improving competitiveness can be achieved by proper domestic reforms with a lasting result. – second, the euro is the only major currency area with its external accounts in balance, which is a strong guarantee of long - term solvency. – third, the euro area ’ s aggregate budget deficit will stand at around 4. 1 % in 2011, less than half that of the uk or the us. the same holds true for public debt, which amounts to 85 % in the euro area while it will soon cross the 100 % mark in the us. many countries are improving their fundamentals. the primary deficit of spain for 2011 will be around 4. 7 %, half that of the us and the uk. italy will be one of the very few advanced economies to have a primary surplus, around 0. 5 %. the imf has recently acknowledged, and even praized, these efforts and commitments. in short, if good fundamentals are an absolute necessity, it is not a sufficient condition. now can we let liquidity spirals lock a country, just like a

ratios close to 100 %. on the other, emerging economies, with high savings, low debt ( around 30 % gdp on average ) and bis central bankers ’ speeches less absorption capacity. our common prosperity will therefore depend on our ability to create stable channels of financial intermediation between those two parts of the world. that, in turn, will crucially depend on the existence of assets that can be considered safe stores of value. but, as i have argued from the start, public debt may not be able to play that role to the same extent as before. the ultimate safe asset, therefore, could be the currency itself. markets will trust currencies that 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 realistic optimism. i see the recent decision by the swiss central bank to peg the swiss franc to the euro as an illustration of this conviction. * * * * a few words now on the french banking sector. first, banks have been hit in all advanced economies by the downward revision of growth prospects. this reaction can be explained by the fact that slower growth means lower profits, thus lower 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 share prices are reacting to negative news on growth. this movement has been more pronounced for french banks which are suffering from two specific vulnerabilities, one real, one exaggerated. the real vulnerability is their dependence on dollar funding, due to the scale of their international activities, which they may have been initially too slow to address effectively. it is currently being dealt with through a combination of deleveraging and consolidation. in the meantime, in order to ease this transition, the eurosystem, together with other central banks across the world, has decided to conduct us dollar liquidity - providing operations with a maturity of three months. a more exaggerated concern about french banks is their exposure to sovereign risk. let me just point out some facts : total exposure of major french banks to the sovereign risk of socalled “ peripheral countries ” amounts to 60€bn. to take an extreme – and from my view point – totally unrealistic scenario – a 50 % haircut on greece and 25 % haircut on italy and spain would result in a 12 % loss