South Korea's top central banker said Wednesday that high sovereign debt poses a threat to economic and financial stability, adding that monetary tightening needs to be backed by efforts for fiscal consolidation.

   "There is a little doubt that high and rising sovereign debt is a real threat to global financial stability," Bank of Korea (BOK) Gov. Kim Choong-soo said in a speech at a conference on how to manage sovereign risk and public debt.

   The governor said highly accommodative policy stances significantly help ease burdens for a country in borrowing with high costs, slowing the pace of an increase in public debt.

   In the short term, inflation could make the value of debt seen subdued, but over the longer haul, high inflation, sparked by soft monetary policy bias, will push up market interest rates and dent economic growth, worsening the fiscal deficit and sovereign debt.

   "Unless counterbalancing fiscal adjustments are deployed, higher interest rates will surely aggravate the already fragile debt dynamics," Kim said, adding that monetary tightening to tame inflation should be accompanied by sustained fiscal consolidation.

   Advanced and emerging countries have poured liquidity into the markets and increased fiscal spending in a bid to tackle the sharp brunt of the global financial crisis. But sovereign debt, mostly for advanced economies including the eurozone, shot up in the process, raising fears that rising public debt is feared to increase market instability and curb the global recovery.

   Kim also added that although South Korea's fiscal conditions remain in good shape, the country also needs to make efforts for fiscal consolidation to brace for the future as the population is fast aging and subsequently, social welfare spending will increase.

Source: Yonhap News (June 22, 2011)