Central banks, bond markets and fiscal credibility – why market stability had become political

Senior central bankers warn that while emergency interventions can buy time during market liquidity crises, long-term financial stability ultimately depends on governments taking decisive political action, says Helen Thomas Two of the world s most senior central bankers have issued a warning that politicians would do well to heed: governments may believe they have years to repair their finances but bond markets can decide otherwise in an afternoon. Last week, Pablo Hernández de Cos, General Manager of the Bank for International Settlements, warned that government bond liquidity can dry up suddenly, shrinking fiscal space “well before any limit implied by long-run fundamentals is reached”. Three days later, Bank of England governor Andrew Bailey reinforced the message. He warned that higher public debt and a changing investor base have made sovereign bond markets increasingly vulnerable to sudden reversals. The danger is not necessarily that governments cannot repay their debts