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Turner warns of deflationary dangers in dual deleveraging

FSA chairman Lord Turner has warned of the deflationary dangers of global economies having to deleverage their public and private debt at the same time.

In a speech in Frankfurt this week, Turner warned “we are far from out of this crisis”, setting out the huge deleveraging challenge to be faced. “It is far deeper and more difficult to escape than many of us thought,” he added.

Turner told delegates that meeting this challenge would require a combination of debt servicing, debt-writedown and forms of controlled debt monetisation. He warned that with both private and public sectors forced to deleverage simultaneously, there was the risk of “self-reinforcing downward deflationary spirals”.

Out of the options to achieve deleveraging – real growth, debt servicing, debt restructuring or inflation – Turner said everyone is in favour of real growth. But he warned this would be difficult to achieve, given the current economic conditions. To deal with the eurozone crisis, he said the central bank must be free to use all possible levers, including quantitative easing. But he warned this is impossible where there is subsidiary sovereign debt – debt issued by a political authority which does not issue its own currency – as it would lead to national debt indiscipline.

He suggested radical reform of the eurozone. He said: “The eurozone architecture needs to combine tight political and market discipline of subsidiary sovereign debt with the creation of Eurobonds and with an acceptance that the ECB can conduct quantitative easing operations at the eurozone aggregate level.”


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