christian noyer : challenges and outlook for the global economy speech by mr christian noyer, governor of the bank of france and chairman of the board of directors of the bank for international settlements, at a press conference, saint - denis, reunion, 14 november 2011. * * * secretary general of the prefecture, elected representatives, consul general of china, representatives of civil and military authorities, ladies and gentlemen, it is a great pleasure to be here today. and not only because it is 20 degrees warmer than paris at the moment, or because i spent the weekend enraptured by the beauty of your island and the friendliness of its people. i am particularly pleased to be here today because it is extremely important for me to have the opportunity to talk directly to local economic players throughout the french territory, listen to their views and explain our actions. above all, in these complex times, such exchanges are tremendously valuable. i would especially like to extend my regards and thanks to the mayor of saint - denis for receiving us in this beautiful venue. i will start by rapidly recalling the crisis to date and the solutions that have been implemented. in the past months we have witnessed a succession of serious and complex events. it is therefore logical that feelings of confusion and uncertainty have developed in society. i will thus attempt to provide some useful insights into the situation that we are currently facing. i would be delighted to listen to your comments or reply to your questions afterwards. * * * the crisis : where do we stand? epicentre no. 1 : the united states between 2006 and 2008 in order to fully understand the current crisis, it is important to realise that it is in fact a new episode of the acute crisis that has been with us since 2006. why 2006? because it was the year in which the us property market started to fall after several years of continued, strong growth. it is perhaps hard to imagine but the turnaround in this market and the problems we are currently experiencing are closely linked. indeed, this downturn greatly affected many low - income households in the united states, who had taken out residential adjustable - rate mortgage loans ( the famous subprime loans ). when the value of their property plummeted, monthly repayments rose sharply, meaning that households were unable to repay their mortgages. this generated losses, albeit very limited at the outset. but how did these limited losses cause the most serious financial crisis since 1929? in fact, subprime loans were packaged into

particular because government bonds provide a floor to the private - sector funding costs. this is the reason why we launched the smp. bis central bankers ’ speeches i insist that, through the implementation of all its non - conventional measures – including the smp – the eurosystem has fully played its expected role as a lender of last resort ( llr ), by which i mean that we have and we will intervene to stem liquidity crises that threaten the stability of the banking system. having said that, it is clear that engaging in large - scale asset purchases of sovereign bonds is well beyond what should be expected of a central bank ’ s role as a llr. moreover, largescale asset purchases are not without risks. while they may help to alleviate upward pressures on long - term interest rates in the short run, they could also affect price and financial stability in the medium - run, by endangering the value of the central - bank money. such risks do not necessarily materialize, but when they do, the repercussions are dramatic. altogether, considering the different tools are potentially at the disposal of policy - makers, it is crucial to gauge the short - to long - run benefits, limits and risks associated with each of them. i do not think that confidence would really benefit from measures that are known to carry non - negligible long - run risks, even if some short - term relief is expected from them. as a way of conclusion, let me shortly consider the progress that has already been made to solve this crisis and list some of the remaining challenges ahead. first, it seems important to welcome the significance of the fiscal stabilization programs many euro - area governments have committed to. as mentioned earlier, this is a necessary step to restore confidence in a sustainable way. although this is a difficult task, the timely delivery of the promised reforms is necessary. second, beyond individual policy actions, the recent progress obtained in the design of a common fiscal governance in the euro area is of the essence. indeed, many important decisions have been taken in that direction : the creation of the efsf and the esm or the agreement on fiscal rules and surveillance mechanisms during the brussels eu summit on december the 8th and 9th are historical steps in the right direction. obviously, most of these newly established institutions, rules and processes would have been unthinkable four years ago. this makes me really optimistic about our prospects for restoring stability and growth in the euro area. thus,