over - priced with markets quickly becoming one - sided as a result of contagion and extreme risk aversion. underlying the crisis is thus a significant fragility of security markets, which calls into question the efficiency of financial markets more generally. bis central bankers ’ speeches from the sub - prime to the sovereign debt crisis at least three aspects of the sub - prime crisis contributed also to the current sovereign debt crisis. first, the sub - prime crisis weakened banks ’ balance sheets, which were still under repair when the sovereign debt crisis came to a head in may 2010. second, the fiscal support given to banking systems and significant spending packages worsened public debts and deficits. third, the lehman bankruptcy left confidence in the robustness of the financial system severely dented. the root cause of the current crisis, however, lies within the shores of the euro area. nonetheless, with the internal and external value of the euro holding up well, this is certainly not a crisis of the euro but a sovereign debt crisis focused on some euro area sovereigns. two things, however, have gone wrong : first, some countries have accumulated debts and deficits, which at a minimum make them vulnerable to self - fulfilling unsustainable dynamics. second, the stability and growth pact was effectively suspended when france and germany escaped sanctions for breaching the debt and deficit criteria in 2003. more generally and at a deeper level, the governance of the economic union, which should complement the monetary union, has been insufficiently articulated since the outset of emu. the standard tool : the official interest rate what has been the role of monetary policy in this context of economic and financial crisis? let ’ s start by first looking at what is often referred to as conventional monetary policy. the standard and most important tool of monetary policy is the official interest rate, in the case of the eurosystem the minimum bid rate in the weekly main refinancing operations. although we characterise this tool as “ standard ”, the financial crisis did require significant and aggressive cuts in interest rates : following the collapse of lehman brothers the ecb lowered, within a period of seven months, the refinancing rate by 325 basis points from 4. 25 % to a historic low of 1 %. the rate was kept at this historically low level until april 2011 when the governing council decided to increase the rate by 25 basis points. this was complemented by another rate increase to the current level of 1. 5 %, which the governing

purchase programme ( cbpp1 ) in july 2009. this initiative had four objectives : first, reducing money market term rates ; second, easing funding conditions for credit institutions and enterprises ; third, encouraging credit institutions to maintain or expand their lending to households and enterprises ; and, fourth, improving market liquidity in important segments of private debt securities markets. the cbpp was announced in may 2009 and € 60 billion of covered bonds were purchased from july 2009 to july 2010. the programme was successful in restarting activity in primary covered bond markets. however, with the recent intensification of the sovereign debt crisis, covered bond markets have again come under significant pressure. at its meeting of 6th october, the governing council therefore decided to announce a second covered - bond purchase programme, cbpp2, within which €40 billion will be bought within the year starting november 2011. cbpp2 shares with cbpp1 the objective of easing funding conditions and encouraging institutions to maintain or expand lending, as well as supporting market liquidity in private debt security markets. securities markets programme the fact that sovereign bond markets in some euro area jurisdictions were becoming increasingly dysfunctional by may 2010, and considerations over the crucial role that this segment plays as a basic pillar of our financial system, motivated the launch of one of our most important non - conventional monetary policies to date : the securities markets programme ( smp ). the main purpose of this programme is maintaining a functioning monetary policy transmission mechanism by promoting the functioning of certain key government and private bond segments. bis central bankers ’ speeches impairment of the monetary policy transmission mechanism caused by tensions in government bond markets can be significant. this can happen, firstly, via the price channel, as the role of the “ risk - free rate ” as a pricing benchmark is distorted. falling values of sovereign bond portfolios also affect banks ’ balance sheets, and reduce, through the liquidity channel the value of government bonds as collateral. in addition to this, excessive volatility of bond prices can also force investors to sell - off their bond holdings and make it more difficult for market makers to do their job. all these channels affect banks ’ and other participants ’ ability to play their role in transmitting our interest rate policy because they negatively affect their intermediation role and can cause a contraction in the supply of credit. the smp should, of course, be clearly distinguished from the policy of quantitative easing. while the objective of the smp is to repair the transmission mechanism, quantitative easing aims at in