jose manuel gonzalez - paramo : the ecb and the sovereign debt crisis speech by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, at the xxiv moneda y credito symposium, madrid, 4 november 2011. * 1. * * introduction it is a great pleasure and honour for me to contribute to this year ’ s 24th edition of the moneda y credito symposium. there is no doubt that advanced economies, not just the euro area, are currently facing a period of exceptional economic and financial instability that requires swift, decisive and credible action by all concerned institutions, each with its own responsibilities. on 26 october the heads of state and government of the euro area agreed on a comprehensive set of measures to restore confidence and address the current tensions in financial markets. these measures include : first, an agreement to secure the decline of greek debt to a level equivalent to 120 % of gdp by 2020. this reduction will be partly achieved via a voluntary bond exchange involving a 50 % nominal discount on notional greek debt held by private investors. euro area member states will also contribute up to 30 bn euro to the psi package. second, a new eu - imf multiannual programme financing up to 100 bn euro will be put in place by the end of the year. third, a significant leveraging of existing efsf resources via two different schemes in order to increase the fund ’ s ability to extend loans, finance bank recapitalisations and conduct bond purchases in the primary and secondary markets. i will describe these schemes in a bit more detail later on. fourth, a commitment to increase the capital position of banks to 9 % of core tier 1 by the end of june 2012 and to facilitate access to term - funding through a coordinated approach to bank liability guarantees at the eu level. fifth, a strengthening of economic and fiscal coordination and surveillance and a commitment to put in place a set of measures, going beyond and above the recently adopted package on economic governance. in the period ahead, it is of paramount importance that this agreement is applied rigorously and quickly in all its dimensions. against this background, i would like to focus my intervention today – from my perspective as a central banker – on the challenging environment for monetary policy created by the ongoing euro area financial and sovereign debt crisis. in the first part of my speech i would like to recall some of the main policy “ failures ” leading up to the present crisis and briefly review the more recent policy

and limited exit route for investors due to lack of secondary market trading. 12. to address these issues some of the measures which could be considered, are strengthening the governance structure of the municipal issuers by ring fencing the municipal bond funds ; providing partial or full guarantee by the central / state government ; mandating escrow account for debt servicing of bond proceeds, etc. sebi has since issued the regulations for issue and listing of securities by municipalities. investor liberalising the investment guidelines for long term players 13. in order to encourage demand, investment norms for regulated entities may be reviewed to facilitate their active participation in corporate debt market. the current investment guidelines for pension and other retirement benefit funds may be reviewed from ownership criteria ( public sector / private sector ) to ratings based criteria. they may also be permitted to use interest rate swaps, repos and credit default swaps. encouraging retail participation 14. participation of retail investors in corporate bonds continues to be limited. in order to increase retail investors ’ participation in corporate bonds, we need to encourage issuance of zero coupon bonds, provide clarity on taxation issues, include provision of special quota for retail investors in debt issues and provide reduced transactions costs for retail investors. intermediaries introduction of a market making scheme 15. a market making scheme in corporate bond could potentially improve market liquidity. but market making in an illiquid market is challenging and not many intermediaries will be ready to take on the risks of making two - way quotes. a viable market making scheme may have to be formulated with suitable incentives to encourage market participants to provide two way quotes. stock exchanges may have to come out with market making scheme in consultation with the regulators. perhaps the role of debenture trustees in this regard may also need to be explored. infrastructure efficient trading platforms for corporate bonds 16. nse has developed a dedicated trading platform for privately placed corporate bonds. there is, however, negligible activity on the trading platform. although the system provides bis central bankers ’ speeches for dvp - iii guaranteed settlement, it is learnt that the system has some issues, viz. high margin, high penalty for default, non - availability of all the issued bonds on the platform, etc. according to some market participants, there is a need for combined settlement for corporate bond repo and outright market under dvp - iii mechanism at par with the g - sec market in order to increase the traders ’ participation. 17. stock exchanges could discuss with the market participants