miguel fernandez ordonez : the crisis and financial markets speech by mr miguel fernandez ordonez, governor of the bank of spain, at the annual financial conference of the asociacion de mercados financieros, madrid, 13 december 2010. * * * good afternoon, and my thanks to the asociacion de mercados financieros for their kind invitation to participate in this lunch colloquium. since the great depression last century, the world has not seen a financial crisis as deep as the present one. and, like then, many years of intense study and a sufficient time perspective will probably be needed to accurately assess the factors that caused the crisis and the mechanisms contributing to its spread. in particular, there is still much to be learned of the relationship between the development of the crisis and the behaviour of financial markets. nonetheless, i shall take this opportunity today to offer some brief reflections on the conduct of markets during the crisis, with a perspective that in no way claims to be all - encompassing since i shall concern myself exclusively with its impact on the spanish economy. to this end i ’ ll discuss two clearly differentiated episodes of the financial crisis of the past three years : the first, which we might call the “ banking crisis ”, affected spain less than other countries ; and the second, associated with the rapid deterioration of public finances in the euro area, has had significant effects on our country. the outbreak of the first phase of the crisis dates back over three years, when a european bank suspended redemptions of funds invested in us mortgage loans. it soon became apparent that the source of these problems lay in us subprime mortgages and in the spread of the associated risk via the “ originate to distribute ” model. banks were hit hardest. major financial institutions collapsed not only in the countries where the problems originated, but also in many others whose banks invested their savings in products generated by the more indebted economies. by contrast, the spanish banking system had not originated or invested in this type of product, thanks largely to the relatively conservative approach behind our regulation and supervision. consequently, although our banks were obviously not immune to some of the effects of the crisis, such as the deterioration in the economic situation or the consequences of the collapse in confidence on the workings of wholesale funding markets, the direct effect on the spanish banking system was relatively minor. during the long expansion prior to the crisis, there was a constant increase in the indebtedness of

of greece? trichet : on behalf of the governing council of the ecb, i said that a credit event, selective default or default should be avoided. question : your biggest objector among the euro countries is germany. they want to prolong the repayability of greek bonds and they want the participation of the private sector. under which conditions would you support this? trichet : i have already mentioned the message of the governing council of the ecb. question : in what way can default be avoided? trichet : that is the responsibility of the governments. question : is it possible for greece to pay back the extra money that they will get from the european countries? trichet : that depends entirely on their capacity to adjust public finances and economic competitiveness, to redress the situation, to deliver a significant primary surplus and to engage in large - scale privatisations in a professional and active manner. all the conditionality of the international community and of the european union is designed to produce this result. question : why does the ecb consider the default of greece such a bad solution? what will happen with the euro area if greece defaults? bis central bankers ’ speeches trichet : again, the message of the governing council of the ecb is known. the decisions are in the hands of governments. that being said, who would consider the default of any sovereign issuer – in the context of a european and global crisis of public finances in the advanced economies – a “ good solution ”? question : estonia did not participate in the first bailout package for greece since it was not in the euro area at that time. do you think estonia should now contribute to the second bailout package for greece, considering that wages in this country are much higher than in estonia? trichet : when one is a member of the euro area, one should participate as actively as possible in the discussion of the rigorous surveillance of the policies of the member countries. and, of course, participate actively in the discussions of the conditionality of the assistance programme, if any. once you have decided on the conditionality, all countries in the euro area should act together. being a member of a single market with a single currency creates a high level of interdependency. i always say that it means sharing a common destiny. question : according to our opinion poll, a huge majority of slovaks don ’ t want to help greece. they also don ’ t support the european financial stability facility and