“Sudden stops” were observed in the funds flowing towards the euro area countries more adversely affected by the sovereign crisis, with changes in the bank deposits in  4  See for instance Cassola, N., A. Durré and C. Holthausen (2011): “Monetary Policy Operations: experiences during the crisis and lessons learnt”, Proceedings of the Sixth ECB Central Banking Conference “Approaches to monetary policy revisited – lessons from the crisis”. 4  BIS central bankers’ speeches  stressed and non-stressed countries. These developments were eventually mirrored in the Target balances of the Eurosystem The large differences in financing conditions across countries translated into a very high fragmentation of credit growth across the national dimension. The ability of banks in some countries to deleverage is heavily complicated by the adverse market conditions. Not only do banks in the affected countries often need to deleverage more than others, but also their portfolios consist of less liquid assets (such as domestic sovereign bonds) and they face, ceteris paribus, higher funding costs than their peers in other euro area countries. Often they are even completely cut off from traditional private sources of funding. With the deepening of the sovereign debt crisis, the Eurosystem undertook additional measures, with a particular view to mitigating the increased heterogeneities in the euro area financial conditions. In 2010, the Securities Markets Programme was launched, aimed at certain important segments of the financial market that were dysfunctional, but vital for the transmission of monetary policy signals.

As PM Mahathir has pointed out, Malaysia’s exchange controls have not harmed its economy. The Malaysian government has been working out bad loans in the banking sector, and getting banks to consolidate into core-banking groups. It is not clear how much corporate restructuring has taken place. But Malaysia’s external debt is relatively low and it can afford a certain amount of very long-term infrastructure projects which may not offer attractive financial returns. In Indonesia, Abdurrahman Wahid has just been elected as the fourth President, with Megawati as Vice-President, in Indonesia’s first truly democratic presidential election in over thirty years. It is a good outcome, after two traumatic years of upheaval and chaos. But the road ahead for Indonesia is not easy. The new government faces many urgent priorities. It must work out a new political balance, redefine the role of the military, lay the basis of a civil society, and strengthen the rule of law. Then confidence will return and the economy will revive. In this arduous task of national reconstruction and reconciliation, Indonesia has the good wishes and support of its neighbours, including Singapore. North East Asia In North East Asia, Japan is finally recovering from its prolonged recession. Public investment, private consumption and housing investments are all improving. We are also starting to see real financial and corporate restructuring in Japan. Sony, Nissan and NTT have recently announced sizeable cuts in their workforces2 – a significant departure from the lifetime employment system.