least a partial substitute for bank credit, an option that is not available to most smes. the adverse impact on credit supply conditions of banks ’ difficulty in accessing wholesale funds moderated in 2012, partly as a consequence of the extraordinary monetary measures adopted by the ecb, a point to which i shall return. meanwhile, however, the crisis had spread again to the real economy. the worsening macroeconomic outlook in italy and the consequent increase in credit risk were again reflected in a credit tightening. in 2012 and in 2013, the number of firms defaulting on loans increased substantially : in the second quarter of 2013 the ratio of new bad debts to outstanding business loans reached 4. 7 per cent, 1. 5 percentage points higher than a year earlier. the related deterioration in banks ’ asset quality has also contributed to the restrictiveness of lending standards. credit rationing hits smes disproportionately. while slightly less common in the immediate past, according to the latest qualitative data, rationing is still a constraint on the economy. it is important to understand that relaxing credit standards is not the solution. a robust, resilient banking system is a prerequisite for a functioning credit market. prudence as regards banks ’ assets is essential to ensure safety for depositors and orderly access to funding markets. confidence is indispensable. what is necessary is to ensure orderly funding conditions, enhance banks ’ resilience without imposing undue procyclical effects on the economy, and diversify the sources of finance for smes, with a view to fostering entrepreneurship, innovation and growth. 3. monetary policy the ecb moved swiftly to counteract the effects of the sovereign crisis on the economy and the impairment of monetary policy transmission across euro - area countries. first, it adopted a highly accommodative monetary policy stance, reducing official rates to their all - time low, with the rate on main refinancing operations now at 0. 50 per cent. second, it took a number of non - conventional monetary policy measures to reduce the fragmentation of financial conditions across the euro area and avoid an unprecedented credit crunch, which would have had dire consequences on the macroeconomic outlook and price dynamics of the euro area as a whole. in particular, in order to ensure more uniform wholesale funding conditions, on 8 december 2011 the ecb announced two 3 - year longer - term refinancing operations, to be conducted as fixed rate tender procedures with

forces of globalization and technological change, and to the need to unwind the domestic excesses and imbalances that had built up in the 1970s and the 1980s. let me remind you that, through that period, high actual and expected inflation had led to escalating production costs, speculative activity, and the accumulation of debt by households, by businesses, and by canadian governments. our foreign indebtedness was also rising rapidly, as were the risk premiums in our interest rates, leaving us in a very vulnerable position indeed. by the late 1980s, the situation had become untenable. canada had to adjust. of course, the united states also had to cope with many of these changes. why has the restructuring been more intense and disruptive in canada? in my view, the most important reasons are that the distortions arising from high inflation were more severe in canada and that the adjustments to globalization and technological change were slow in coming. as a result, canada had to do more and do it faster. the short - run disruptions associated with the economic restructuring have been significant. plant closings, cutbacks in major government programs, and layoffs in both the private and public sectors caused a great deal of uncertainty among canadian households. and it did not help that interest rates rose sharply in 1994 and early 1995 as investor nervousness about canada ’ s fiscal and political situation increased in the wake of turbulence in global financial markets. all of this left canadians anxious about the future and cautious about spending, which acted as a drag on output and employment. but there have also been some particularly encouraging results from the restructuring. canada has made rather dramatic economic adjustments in recent years, and as a result has emerged with a much sounder economic foundation. inflation has averaged just under 2 per cent during the past five and a half years - - well below that in the united states. with the benefit of low inflation and low interest rates, canadian businesses have been investing in new technology and streamlining their operations to become more efficient, productive, and internationally competitive. canadian governments have taken steps to reduce their deficits and to move towards less vulnerable debt positions. and, with our success in exporting and these improved fiscal positions, the persistent large shortfall in the current account of our international balance of payments has narrowed markedly. these improvements in canada ’ s economic fundamentals have not been lost on financial markets. they are the reason why risk premiums demanded by investors on canadian dollar assets have declined sharply over the