memories of developments during the recent global financial crisis. more visible was the sharp decline in the euro in foreign exchange markets and plunging stock markets worldwide. in response to these rapidly deteriorating financial conditions, in the early hours of monday, may 10, european leaders announced a much broader package of stabilization measures than that previously announced for greece alone. one set of initiatives addresses sovereign risk. the european leaders announced the establishment of a european financial stabilization mechanism that would be based on up to €60 billion in european commission funding and a special purpose vehicle that could raise up to €440 billion in additional funds in capital markets with guarantees provided by member state governments. moreover, the imf stated that it stood ready to cooperate with the eu, in accordance with established imf lending programs and procedures, if requested by euroarea members. according to the eu, total available support through loans and credit lines, including potential bilateral imf loans to member countries, could be as large as €750 billion ( approximately $ 900 billion ). in addition, the eu and the imf announced final approval and funding for the earlier announced greek rescue package in an effort to assuage concerns about the country ’ s financing needs. another set of initiatives addresses market liquidity. specifically, the european central bank ( ecb ) announced that it was prepared to purchase government and private debt securities to ensure the depth and liquidity of euro area debt markets that were considered dysfunctional. in addition, the ecb expanded its liquidity provision facilities, including offering full - allotment operations for three - and six - month loans. finally, as i will discuss in more detail later, to forestall an emerging shortage of dollar liquidity, the federal reserve reopened temporary u. s. dollar liquidity swap lines with the ecb and other major central banks. the effect of the announcement on bond markets was immediate. bond spreads for the peripheral european countries narrowed substantially, at least partly reflecting purchases of government securities by euro - area central banks. the ecb ’ s enhanced liquidity provisions, including dollar credit from the liquidity swaps, have contained stresses in the european interbank market and provided an important backstop for these markets. stock markets also initially rebounded strongly following the announcement of the european package ; however, their declines over the past week serve as a reminder that investors are aware that this package cannot ultimately relieve the need for real, and likely painful, fiscal reforms in some euro - area countries. potential ramifications for

end of the transaction. swap facilities were reestablished with central banks in europe ( the ecb, the bank of england, and the swiss national bank ), japan ( the bank of japan ), and canada ( the bank of canada ). the agreements establishing these facilities can be seen at federal reserve bank of new york, “ central bank liquidity swaps. ” amounts outstanding on the swap lines are posted weekly at federal reserve bank of new york, “ federal reserve foreign exchange swap agreements. ” conclusion the agreement of the federal reserve to reinstate foreign exchange swap arrangements was designed not to insulate banks and investors from losses they may incur, but as a prudent effort to help minimize the risk of financial turmoil in europe, with the consequences that would ensue for the global financial system, including the united states. in the worst case, such turmoil could lead to a replay of the freezing up of financial markets that we witnessed in 2008. with unemployment remaining quite high, and with continued need for balance sheet repair by many businesses, financial institutions, and households, it is particularly important that the united states not sustain a significant external shock. the policy measures announced by european authorities a week and a half ago elicited a quick, strongly favorable market reaction, holding out hope that further financial disruptions can be averted. however, as reflected in the negative turn of equity markets later in the week, and continued tight funding in some european markets, uncertainties are still clouding financial markets. market participants continue to seek clarification of the terms and scope of the measures broadly outlined by the relevant european countries and institutions. in europe, a key near - term priority is to continue work to prevent a drying up of liquidity by providing both euro - denominated and, through the dollar liquidity swaps, dollar - denominated credit to financial institutions. but, even if effectively implemented, this support, along with the support for sovereign debt markets provided by the other components of the eu package, will not solve the sovereign debt problems ; it will only provide time to make necessary policy adjustments. lasting beneficial effects will require credible action to bring fiscal deficits under control. for the eu as a whole, it seems clear that the mechanisms of the european economic and monetary union need further development if it is to achieve its intended aims. last week, the european commission issued a communique outlining plans to enhance surveillance and develop a crisis management framework. i would anticipate