the key challenge for the euro area, now more than ever, is to continue to strengthen the forces of production and expand the trend output growth of the economy in a decisive manner. this will require a deepening of structural reform in the labour and goods markets, as well as technological innovation. likewise, governments should pursue determined reforms with regard to the size and structure of public expenditure and revenue, also in order to create room for further tax cuts and to absorb the fiscal costs of population ageing. together with continued wage moderation aimed at sustaining recent labour market gains, these reforms will foster employment and investment. with the ecb pursuing its primary objective of price stability, with governments willing to foster structural reforms and conduct stability - oriented fiscal policies, and with wage developments consistent with job creation and price stability, the euro - which is now also available in the form of banknotes and coins - will represent an economic area characterised by macroeconomic stability and economic dynamism. we are now at your disposal for questions..

tendency by lenders to accept breaches of loan covenants, could have contributed to a perpetuation of the benign credit cycle, while at the same time increasing the risk of clusters of defaults in the event that liquidity conditions deteriorate. because of the high yields they offer, leveraged loans have become popular assets for inclusion in complex structured credit derivatives products and the riskiest parts of them are often sold to hedge funds. disturbances in the leveraged loan market could therefore also trigger spill - over effects via the aforementioned “ triangle ”. looking ahead, rapidly rising leverage, the increasing recourse to short - term funding and the surging interest payment burden have left firms ’ balance sheets vulnerable to adverse disturbances. [ see slide 9 ] although the increase in euro area corporate sector leverage should be considered in conjunction with the continued strength of profitability, it seems nevertheless to have contributed to deterioration in some yardsticks of credit quality. these include a higher proportion of rating agency downgrade actions than upgrades and a rising number of firms being placed on review for a rating downgrade visa - vis firms facing a possible rating upgrade. this seems to be at least partly related to the aforementioned growing lbo, as well as share buyback, activity both of which can weaken the position of existing corporate debt holders and increase the affected firms ’ vulnerability to changes in financing conditions. a significant deterioration in corporate sector credit quality would not only imply greater loan losses for banks, but could also trigger an asset price adjustment in credit markets, especially if the frequency of unexpected idiosyncratic corporate defaults were to rise. euro area household sector leverage has reached unprecedented heights. thus, past experience is not relevant for assessing its sustainability. although household sector debt ratios in the euro area on average have remained lower than those in other mature economies, risks are not evenly spread across the euro area. indeed, there are continuing concerns regarding balance sheet vulnerabilities in countries where debt - ratios are well above the euro area average, especially if debt is predominantly financed at variable interest rates. [ see chart on the left of slide 10 ] regarding risks to household income, survey evidence reveals that euro area households have become less pessimistic concerning their future employment prospects but have remained pessimistic about their financial outlook. [ see chart on the right of slide 10 ] all in all, however, considering the outlook for economic growth, the likelihood of a decrease in household income in the near term is judged to be low