nicholas c garganas : recent financial market developments and implications for the euro area and the world economy keynote speech by mr nicholas c garganas, governor of the bank of greece, at the meeting of the international chamber of commerce ( icc ) commission on banking technique and practice, athens, 16 april 2008. * * * it is a pleasure indeed to welcome you to athens for this meeting of the international chamber of commerce commission. this meeting is taking place at a time of turmoil in global financial markets and a significant downturn in global economic growth. i am delighted to have this opportunity to offer some remarks about the present situation and the challenges ahead. we are living in the era of the great globalization and the icc has been an invaluable voice championing the benefits – including enhanced economic growth, prosperity, and job creation – of increased economic and financial integration. while globalization brings important benefits it also, sometimes, brings heightened risks and uncertainties, as recent financial market developments vividly illustrate. the last nine months have been a very challenging period for both policy makers and market participants. during this period, we have witnessed a major reappraisal of risk and a considerable, and still ongoing, turmoil in key financial markets. we have also seen – especially in the us and, to a lesser extent, in the euro area and the rest of the world – downward revisions of growth prospects amid increased risks and uncertainties. in order to be able to ensure that the full benefits of globalization are shared by our citizens, it is necessary to be able to manage the risks and uncertainties associated with globalization. my remarks today, will deal with the origins of the ongoing financial markets turmoil, the policy responses to this turmoil, mainly by the major central banks, and prospects and policy challenges for the euro area and the global economy in the light of this turmoil. greece will, therefore, not be the focus of my remarks this morning. let me just note that greek banks generally have a relatively comfortable capital base and strong profitability, their exposure to u. s. sub - prime mortgage loans has been negligible, while the impact of the international financial market turmoil on the greek banks has so far been indirect and rather contained. however, the financial market turmoil is far from over and there are still risks ahead of us. for this reason, the bank of greece has urged financial institutions to be especially prudent in their portfolio management. origins of the current financial market turmoil although the financial market turmoil

remained within target. this gives us confidence that we will be maintaining the growth in money so that there is sufficient liquidity to satisfy the needs of the real economy, without risking a run - up in inflation. ladies and gentlemen, i would now like to turn to the banking sector. supported by improved macro - monetary conditions, banking sector shows stronger condition. this was reflected in a stronger capital structure, improved npls, stronger profitability and recovery in bank intermediation. all banks are now in compliance with the mandatory capital adequacy ratio of 8 %. this has allowed the banking sector ’ s net income to grow as new credits extended have increased in the first half of the year and non - performing loans continue to remain under control with net npls reaching only 1. 02 % in june. given the improved financial condition of the banking sector, the government is in position to privatize banks to be owned other than by the government. among our major accomplishments in this area, have been the sales of bca, and bank niaga, the privatization of bank danamon, and the initial public offering of 20 % of bank mandiri. the government will press forward with the divestment of the remaining ibra banks with plans to sell majority stakes in bank lippo and bank internasionel indonesia by november of this year, and bank permata by february 2004. the government also plans to sell 20 % stake in the state - owned bank rakyat indonesia in september of this year. ladies and gentlemen, despite all these encouraging development in the area of monetary and financial stability, issues, challenges or even problem remains. these problems will remain with us for some time to come. the issues on the monetary front is on the mechanics and the cost of maintaining stability. in the banking front, reluctant intermediation process and maintaining financial stability in the new environment are the most pressing issues that need to be addressed. on a wider circumstances, we are facing credibility issues in light of the upcoming separation from the imf program. in the monetary front, the challenge is rooted in the slow recovery of bank intermediation function. bank lending is still limited because of high level of risks and uncertainty and the large number of companies still undergoing restructuring. credit crunch phenomenon has been evidenced and the response of bank loan rates to the sbi policy interest rate is relatively slow and lagging. with slacking real sector and bank lending, the transmission mechanism of monetary policy to the real economy and