glenn stevens : australia ’ s economy against the background of recent international developments opening statement by mr glenn stevens, governor of the reserve bank of australia, to the house of representatives standing committee on economics, sydney, 7 march 2014. * * * madam chair members of the committee thank you for the opportunity to meet with you today. when we met with the committee just prior to christmas, i suggested that, taking an international view, 2013 could be described as a year that turned out not to be quite as good as hoped for, but not as bad as feared. nothing that has occurred in the period since then would change that assessment. one prominent international event was that, within hours of that hearing, the us federal reserve commenced the “ tapering ” of its monthly asset purchases. this was a possibility we talked about at the time and, although the timing of it wasn ’ t known, it was considered likely that it would begin before long. a further reduction in asset purchases was decided at the fed ’ s january meeting. after all the anticipation of this change, the actual announcement of the fed ’ s decision caused little disruption in markets in december. during january there was more volatility in markets, and a few emerging economies came under pressure, with bond yields spiking and exchange rates declining. it is important to keep this in perspective. periods surrounding changes of course by the fed have often been times when market participants re - assess their positions and their appetite for risk, and this occasion has been no exception. it isn ’ t necessarily the fed action per se that is most important, but rather what it conveys about the overall economic and financial environment. at such times investors sometimes start to focus on risks to which they had hitherto been attaching little significance. investors have not, however, fled from risk indiscriminately on this occasion, at least to date. they have drawn distinctions between alternative classes of investment and different countries. long - term sovereign yields of the core advanced countries have increased a little, but they remain low. with compressed risk spreads, this means that borrowing costs for many private - sector borrowers remain very low. the spreads over german yields for european sovereigns have continued to fall. this suggests that actions by european policymakers have had more influence on european markets than actions by the us authorities. this is as one would expect, but it hasn ’ t always been the case in the past. moreover, not all emerging markets are experiencing the same pressure

avoid further emergency procedures. these changes involve : removing the scope for taking on excessive leverage via regulatory arbitrage ; making sure that adequate capital is held against risk that is being incurred ; ensuring better management of funding liquidity ; countering, to the extent possible, the inherent tendencies in both human nature and regulation to form assessments of risk in a pro - cyclical way ; and improving resolution processes to ensure orderly and rapid crisis management and to help manage the issue of “ too - big - to - fail ” institutions. these are all very important goals. the australian authorities support them. but as we have said before, the really serious problems were generated in a relatively small number of very large, internationally active banks. they did not stem from the thousands of other banks around the world which have not needed to be “ bailed out ” and whose capital resources have, in most cases, proved adequate to cover normal losses in a cyclical downswing. hence it is important not to shackle unnecessarily the latter group in our efforts to constrain the relatively small number which caused much of the problem. challenges from sovereign debt turning from banks to markets more generally, a recent development has been the increasing focus on sovereign debt and creditworthiness. the initial manifestation of this was late last year when dubai world requested a six - month standstill agreement on its debt repayments. more recently, the focus has been on greece, after it was revealed that the greek government ’ s current borrowing requirement was much larger than had been previously disclosed. greece is a small country – accounting for only half of one per cent of the world ’ s gdp. the significance of greece is that it is a euro area country, which means two things. first, its adjustment to its predicament cannot involve currency depreciation ( unless it were to leave the single currency ). the only way it can grow out of the problem is by gaining competitiveness against other european economies via domestic deflation, which will be a difficult and lengthy process. a very large fiscal consolidation is an unavoidable part of this path. second, the euro area has an interest in this effort succeeding, which is why there has been intense discussion about whether, and in what form, european assistance might be forthcoming. any assistance would of course have to pass the test of credibility more generally in europe, and would need to be applicable under similar terms to other euro area countries if needed. this is obviously a difficult problem,