are that euro area growth will atrophy rather than accelerate. research also suggests that providing a central bank backstop for government finances can have detrimental effects on capital allocation by the financial sector. a recent study by viral acharya8 and others looks at the real effects of the announcement of the omt programme and finds that while it stabilised the banking system, it also increased zombie lending by banks to unproductive firms. creditworthy firms in industries with a prevalence of zombie firms suffered significantly from credit misallocation, which slowed down the economic recovery. who, then, should take on the hot potato of policy intervention to avoid the pitfalls of last resort lending when a country runs into financing troubles? it might help to look at what can be done to mitigate the ill - effects of central bank lending to banks. the answer here is an effective bank recovery and resolution regime. if banks turn out to be not temporarily illiquid but truly insolvent, they will need to be restructured or resolved. as the late allan meltzer once quipped : " capitalism without failure is like religion without sin. it doesn't work. " this holds for banks and for companies in general. in the euro area, progress has been made in terms of requiring banks to hold higher capital buffers as well as establishing the single resolution mechanism. but similar progress is lacking when it comes to the possibility of restructuring sovereign debt. the esm could function as a vehicle for such a regime. but crucial elements are still missing. one such element is changing the contractual terms of government bonds in the euro area by 4 / 7 bis central bankers'speeches introducing an automatic maturity extension for all bonds, which would be activated the moment a government applies for an esm programme. ongoing deficits would therefore be financed, but original creditors would not be paid off for maturing bonds. not only would this continue to provide incentives for private creditors to lend cautiously, it would also significantly reduce the need for financial aid under an esm programme. furthermore, it would vastly broaden the scope of the rescue mechanism. had it been possible to automatically extend the maturity of bonds back in 2011, portugal would only have needed around €43 billion to cover its entire budget deficit until 2014, rather than the €76 billion in total that it received in assistance loans. this solution would allow the esm to work as a restructuring regime. automatic maturity extension buys time to figure out whether a country is merely facing a liquid

burkhard balz : bolstering confidence, high - quality financial development promoting a chinese path to modernization keynote speech by mr burkhard balz, member of the executive board of the deutsche bundesbank, at the tsinghua pbcsf global finance forum " bolstering confidence, high - quality financial development promoting a chinese path to modernization ", beijing, 20 may 2023. * * * 1 introduction ladies and gentlemen, i am delighted to be able to speak to you today here at the tsinghua pbcsf global finance forum in beijing. as a central banker, i can certainly relate to the conference title, " bolstering confidence ". you see, confidence is a central bank's most valuable asset when it comes to fulfilling its tasks to the best of its abilities. none more so than in times of turbulence, when trust and confidence provide an essential basis. and we are living through turbulent times, there is no doubt about that. rarely has the immediate future been as incalculable und unpredictable as it was over the past three years. following on from the coronavirus pandemic, russia's war of aggression against ukraine has sparked deep uncertainty and sent anxiety levels soaring around the globe. the war poses potentially a threat to the tried - and - tested system of international cooperation and is placing a strain on the global economy. but surely everyone must grasp that the major global challenges we face in our time – first and foremost, climate change – can only be overcome if we pull together. and there are other developments as well which are putting many countries to a stiff test – the digital transformation is just one topic i could mention here. but true to the upbeat conference title of bolstering confidence, let me begin with some comparatively cheery news from germany. 2 economic activity and inflation germany's economy has weathered the fallout from the pandemic and the war better than had been feared for a time. true, the braking effect of higher energy prices in particular made itself felt for a while, and german economic output contracted by 0. 5 % in the fourth quarter of last year. but the current quarter is now expected to see a moderate rise ; real gdp is likely to increase somewhat on average in 2023. the german economy has proven itself to be more resilient and more adaptable than it is often believed to be. but what's far too high right now is inflation. measured in terms of the hicp, consumer