efforts to maintain the confidence. governments make their efforts to maintain the mediumto long - term fiscal balances. central banks maintain the stability in prices and the financial systems through the conduct of monetary policy, through actions as the lender of last resort, through financial supervision, and others. private banks maintain their capital base, manage various risks, and provide credit intermediation and payment services. my point here today is the interdependency of confidence. confidence in each issuer is supported not only by the issuer ’ s own efforts but also by the fact that confidence in other issuers is maintained and that members in society understand the importance of confidence in each other. now, i will elaborate on the interdependency of confidence. determination by the government to underpin confidence in private financial institutions first, confidence in bank deposits of private banks, or in debts of financial institutions, is significantly affected by confidence in governments as well. the global financial crisis after the failure of lehman brothers demonstrated that. after the failure, financial institutions lost confidence in each other ’ s creditworthiness, and the interbank money markets almost stopped working. under the circumstances, central banks acted as the lender of last resort and aggressively provided funds in order to deal with the liquidity shortage of financial institutions. although the provision of liquidity by central banks was extremely important during the crisis after the failure of lehman brothers, it alone was not enough to restore the stability of the financial system. that was because the adverse feedback loop between the financial system and the real economy eroded capital positions of financial institutions and thereby confidence in their solvency significantly. as the central issue shifted from the liquidity shortage problem to the capital shortage problem, governments were required to inject public capital and to guarantee senior debts of the financial institutions in order to bis central bankers ’ speeches restore confidence in private financial institutions. the amount of public capital injected by the governments of the united states, united kingdom, germany and france during the recent global financial crisis reached an equivalent of 84 trillion yen. 1 the experience above suggests that the stability of money and the financial system also depends on confidence in governments. support by the public to underpin confidence in a government second, having talked about the importance of confidence in a government, i would like to emphasize that confidence in a government is, in the end, underpinned by support by the public. after the global financial crisis, fiscal conditions in many countries deteriorated seriously as a result of decreases in fiscal

revenues associated with the downturns in economic conditions, aggressive fiscal policy and capital injections to financial institutions. the international monetary fund ( imf ) reported that fiscal deficits of advanced economies in g20 countries were 1. 7 percent of gdp in 2007. the deficit rose to 9. 4 percent in 2009 and are projected to be as high as 8. 0 percent in 2011 ( slide 2 ). the report notes that about an half of the increase in outstanding public debts in g20 advanced economies is due to the decrease in fiscal revenues, while nearly 20 percent of the increase is due to fiscal stimulus measures and the authorities ’ support to financial institutions. 2 when fiscal conditions deteriorate, confidence in a government ’ s ability to repay its debts declines. as i mentioned earlier, confidence in private financial institutions is affected by confidence in a government as well. therefore, when confidence in a government is undermined, confidence in private financial institutions is affected through various channels. the channels include a decline in the value of government securities they hold, erosion of their ability of funding due to the depreciation of values of collateral among others. real economic activity suffers from rises in funding rates and difficulties in obtaining liquidity. as a result, tax revenue declines and confidence in a government ’ s ability to repay their debts is weakened. in other words, an adverse feedback loop emerges among sovereign risk, the financial system and real economic activities. although the cause of sovereign debt problems in european peripheral countries varies from country to country, the common nature of the problem is such adverse feedback loop. when private financial institutions faced the financial crisis, governments succeeded in stabilizing the economy and the financial system by injecting public capital and conducting countercyclical fiscal policy. a prerequisite for such success is that a government is perceived to secure future revenue to cover the current expenditure. if a government is perceived as lacking sufficient future revenue to cover increased expenditure due to public capital injection or expansionary fiscal policy, the effect of the policy measures may lessen, or even worse, could be adverse. the key to success of various aggressive policy measures in an emergency is confidence in the government ’ s ability to maintain the sustainability of medium - to long - term fiscal balance. various aggressive policies by a government in a crisis become effective only when a government has a “ stock ” of confidence in it. and the substance of the stock is, in the end, support by the public to maintain the sustainability of fiscal balance.