The national debt of euro-region countries “cannot be considered risk-free,” Turner said, according to the text of a speech to be delivered in Dublin today. “Fixing this problem is almost certain to require the creation within the euro zone of a true risk-free asset such as euro bonds, playing the same role within the euro zone banking system that T Bonds play in the U.S. and gilts within the U.K.”
Without integrating euro-area treasuries, it would be impossible to “permanently cut the toxic link between euro-zone bank and sovereign credit risks,” Turner said. The text of the speech was distributed by the FSA.
Common bonds as a way to stem Europe’s debt crisis and preserve the 17-nation monetary union have support from southern nations including Greece and Italy. German Chancellor Angela Merkel opposes the idea, saying the bonds would paper over differences in competitiveness in the euro area and ease pressure for budget cuts in the most-indebted nations.
Turner said the move toward greater fiscal integration and common bonds will require “political choices” and “therefore it is likely to be slow.”
In the meantime, Europe’s two main rescue funds -- the temporary European Financial Stability Facility and the permanent European Stability Mechanism -- should be allowed to inject funds into the region’s banks directly, rather than via national governments, Turner said.
Turner also called for a change to proposed European Union banking legislation to allow national regulators full powers to set capital levels for their own banks.
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