and paying down that debt acts as a dragging anchor on the economy that takes many years to break free from. if we had forgotten this lesson from history, recent economic and financial data have provided a reminder that in a world awash with debt, repairing the balance sheets of banks, households and governments will take years. in canada, we weathered the crisis better than most advanced economies. our recession, while sharp, was shallower and shorter than many, and we have few internal impediments to recovery. our banks are among the strongest in the world, and we have the best fiscal situation among the g - 7. nonetheless, an anemic u. s. recovery, as well as a persistently strong canadian dollar and elevated global risks, are all weighing on growth here. this new, more modest global economic landscape has implications for a number of issues. i will develop three of these under the headings sovereign risk, shifting economic centre of gravity, and low for long. i will then say a few words about private risk management in this new landscape, as well as the public policy priorities that are necessary to sustain the recovery and support financial stability. bis central bankers ’ speeches sovereign risk let me start with sovereign risk. the immediate issue is europe : i don ’ t need to tell this audience that the fiscal and financial strains in europe are acute. widening sovereign spreads on an expanding group of euro - area country bonds are challenging fiscal sustainability in these countries. the leading - edge consequence is the buildup of funding pressures on european banks. most have seen their funding costs rise sharply, their access to financial markets curtailed and their equities trading at historic lows relative to the value of their assets. these challenges are compounded by the impossibility of currency adjustments within a monetary union. without the option of devaluation, prolonged deflationary adjustments are required in countries that must restore competitiveness. while the situation in europe is immediate, the need for agreed measures to restore fiscal sustainability in the united states and japan is no less important. increasing uncertainty about the ability of the political process to deliver the needed adjustments is reflected in recent sovereign downgrades. these fiscal challenges are manageable with political will and sound execution, but as long as large debts need to be refinanced, sovereigns will remain vulnerable to changes in global growth and investor sentiment. this presents a fundamentally new landscape in which government debt can no longer be considered a risk - free asset in many advanced

crisis, joint stock reform of state - owned commercial banks enhanced their overall strength and resilience and strengthened the foundation for financial stability. third, the financial legislation system and supervision ability has improved. fourth, the financial market, including delivery of services and product innovation, was not sophisticated, and this helped ward off crisis. currently, china ’ s financial system faces the challenge of guarding against systemic risks. on one hand, to address deep - rooted problems in the economic structure and the uneven and unbalanced growth, it is necessary to adopt sustainable and sound macro - economic policies ; the expansion of domestic credit supplies remains strong and cross - border capital movement contains potential risks. excessive liquidity, inflation, asset price bubbles, periodic non - performing loans and other risks may build up and undermine asset quality and resilience of china ’ s financial sector. one the other hand, in the past few years, many financial institutions are offering cross - sector and cross - market products ; financial share - holding companies have established complex internal structures and moved into diversified businesses ; new - type of financial institutions are heavily involved in the financial market activities. given china ’ s domestic situation, the stability of the financial system and macroeconomic policies are directly related. due to the large share of bank credit in total financing, there is a close relationship between fluctuation of credit supply and economic cyclical change on one hand and systemic financial risks on the other. therefore, the establishment of counter - cyclical adjustment mechanism is our priority in strengthening macro prudential policy. the people ’ s bank of china, with a mandate in china ’ s macro - economic management and financial stability, needs to build a counter - cyclical adjustment mechanism to increase flexibilities in macro - economic management. meanwhile, it is necessary to strengthen monitoring on systemically - important financial institutions to prevent and properly manage potential systemic risks. macro - prudential policy is a relatively new concept in china. to avoid misunderstanding and simplification of it as just capital requirement, capital buffer, liquidity, leverage, etc, first of all, we need to clarify its essential meaning, framework and concrete content. in general, firstly macro - prudential policy is counter - cyclical. secondly, it needs to deal with market failure such as herding phenomena to enhance financial market soundness and prudence of market participants. thirdly, along with globalization, rapid expansion of financial market, increasing complex financial instruments and trading, it is necessary to