policy was severely impaired. first, we saw impairments to the traditional inter - temporal arbitrage mechanism, which has curtailed the effectiveness of our standard monetary policy. second, horizontal and spatial fragmentation – that is, impairments across banks, markets and countries resulting from structural impairments have challenged monetary policy operating with a single instrument. these dynamics were exacerbated by an adverse feedback due to the close association of banks and their sovereigns. bis central bankers ’ speeches these two dimensions of fragmentation have been mutually reinforcing. for example, the lack of cross - border liquidity in the interbank market impaired the price - finding mechanism along the yield curve. as a result, our monetary policy impulses were not evenly transmitted across countries or adequately along the yield curve. furthermore, we saw the emergence of a tail - risk in the euro area, which triggered selfperpetuating dynamics in the economy. 1 a “ bad equilibrium ” of an adverse scenario was possible, triggered by self - fulfilling and reinforcing expectations. 2 in this adverse scenario, the expectation of one or several countries exiting the euro would have driven public and private financing costs in these countries at such a high level that they would have had no other option than to actually exit. it is clear that the root causes of the adverse scenario were associated with substantial losses in competitiveness, lack of fiscal sustainability and financial risks in national banking sectors. but an additional factor became prominent : redenomination risk, reflecting fears of a possible imminent euro area break - up. while exchange rate risk across euro area countries should have disappeared permanently with the creation of the single currency, there were signs, since the start of the year and increasingly so during the summer 2012, that investors had started pricing in redenomination risk. in investors ’ perception, the monetary union had turned from a single currency area into a fixed nominal exchange rate system cursed with the classical “ peso problem ”. investors required an interest rate premium as a compensation for the risk that the euro might not remain the irreversible currency of the euro area – at least in its current composition. indeed, redenomination risk was apparent in the market for government bonds. the inversion of the slope of the term structure of sovereign bond spreads observed in early summer 2012, for instance, for spain and italy was consistent with expectations of imminent break - up risks. markets perceived a high probability that obligations may not be repaid in full, or equivalently be rep

of the structure and pricing of the targeted longer - term refinancing operations ( tltro iii ) programme. these flagship initiatives were accompanied by a suite of supporting measures, including the easing of the collateral framework along various dimensions. [ 3 ], [ 4 ] in parallel to the monetary policy measures, the european banking supervision ( single supervisory mechanism ) and national macroprudential authorities also quickly implemented a host of countercyclical measures. the pepp and the easing of conditions under the tltro programme have been the two cornerstones of our monetary policy response : their design and calibration are directly linked to the evolution of the pandemic and its impact on the monetary transmission mechanism and the economic outlook. https : / / www. ecb. europa. eu / press / key / date / 2020 / html / ecb. sp201126 ~ c5c1036327. en. html 1 / 19 01 / 12 / 2020 monetary policy in a pandemic : ensuring favourable financing conditions the pepp plays a dual role of stabilising financial markets and contributing to easing the overall monetary policy stance. the stabilisation function, which is facilitated by the ability to purchase volumes in a flexible manner over time, across asset classes and countries has been successful in addressing fragmentation risks, has provided a stabilising force for markets and has helped to reverse the tightening in financial conditions that was observed earlier in the year, as illustrated by the convergence of the euro area gdp - weighted sovereign yield curve to the overnight indexed swap ( ois ) curve, which is an important indicator of the euro area risk - free term structure ( chart 1 ). [ 5 ] sovereign bond yields, in turn are central for determining the funding conditions of banks, corporates and households across the euro area. moreover, the pepp eases the monetary policy stance by extracting duration risk held by investors. by pushing down the medium - to - long end of the yield curve, the pepp also reinforces the impact of negative interest rates and forward guidance on the path of policy rates. chart 1 drivers of the euro area gdp - weighted 10 - year yield ( percentage points ) source : ecb calculations. note : the latest observation is for 24 november 2020. in addition, the easing of the conditions governing the tltros has been crucial in warding off the risks of a credit crunch. this effect was reinforced by an easing of collateral requirements to ensure that banks could