guy debelle : the financial situation three years on speech by mr guy debelle, assistant governor ( financial markets ) of the reserve bank of australia, at the westpac macro strategy forum, sydney, 9 september 2010. * * * thanks to patrick d ’ arcy, megan garner, crystal ossolinski and andrew zurawski for their help. it is now a little over three years since the onset of the financial crisis in august 2007. since that time, financial markets have varied substantially in terms of pricing, volumes and functioning. conditions in global markets now are markedly improved from their dire position in the last quarter of 2008. markets have not returned to their pre - 2007 state, but that is generally a good thing as those conditions were not sustainable ( as indeed they proved not to be ). notwithstanding this, conditions in some markets remain somewhat fragile, reflected in still elevated volatility. in part, i think this is because the events of 2008 are a recent memory and practitioners now know how to retreat rapidly, instead of this process taking over a year as occurred between august 2007 and september 2008. we saw some evidence of this back in may this year. what i intend to do today is talk about the state of play in financial markets, focussing primarily on the foreign exchange market and the domestic bond market. i will focus on structure and functioning and how these have changed over the past three years. throughout the period, australian financial markets have generally operated with less dislocation than those in other parts of the world and that remains true today. foreign exchange the foreign exchange market has been amongst the most resilient of markets throughout the financial crisis. indeed, its resilience and the increasing attractiveness of foreign exchange as an asset class have seen many financial institutions expand their staffing in this area, even while they have been shrinking elsewhere. the most recent data published by the foreign exchange committees in the major markets confirm this view. turnover in these markets has increased by 30 per cent from the lows of early 2009, to be above its pre - crisis levels ( graph 1 ). the same picture can be gleaned from the just - released bis triennial survey which shows global turnover averaged us $ 4 trillion a day in april 2010, 20 per cent higher than in april 2007. by market, this growth has been broad - based. the uk, which is the largest market, experienced slightly above - average growth while market share declined in the rest of europe. the australian

congruence while preventing the risk of future fiscal dominance is to establish clear and credible reaction functions for monetary and fiscal policies : for the central bank, the mandate provides a clear guidepost. forward guidance will of course be very useful in this process, to ensure a smooth and predictable exit. for governments, policy commitments and forward guidance are perceived as less credible because of the well - known time inconsistency problem. a more appropriate route would be to ensure that fiscal rules continue to anchor the medium - term trajectory of public debt, but under a renovated eu fiscal framework, which has become too complex and less suited to the new economic and financial environment. indeed, the current low interest rate environment ( with r < g ) does not mean that public debt sustainability issues have become irrelevant : it only implies that governments have more time to ensure debt sustainability. against this backdrop, the revised and simplified fiscal rules should be based on a medium - term debt trajectory and on a single operational target, namely a ceiling on the growth rate of public expenditures ( net of discretionary revenue measures ) as proposed by the european fiscal board ( efb ). first, given the current low interest rate environment and the high levels of post - covid debt ratios, the speed of adjustment towards the long - term debt anchor should be made more country - specific and less rapid than under the current 1 / 20 linear rule of the sgp, which is no longer credible. second, for the operational target, relying only on the current interest burden, as suggested by some, would be at once short - termist and too partial. but interest payments could be included in the net expenditure target, unlike the efb proposal which excludes them. this 3 / 4 bis central bankers'speeches inclusion would give more fiscal space to governments as long as interest rates remain low, but would ensure an automatic downward adjustment of primary expenditure growth if and when interest payments start to increase. the bottom line is that the long - term sustainability of public debt should be ensured by credible but flexible fiscal rules. in parallel, we could maintain the possibility of responding to large shocks through a permanent common fiscal capacity ; in this respect, the next generation eu package is a positive breakthrough, and could be made permanent, although with more limited amounts. a few days ago, mario draghi, speaking at the italian senate in his current capacity as prime minister, rightly backed “ an increasingly integrated european union that will arrive at a common public budget capable of supporting countries