others result from deliberate or inadvertent policy ‐ induced distortions, which should have been reduced or eliminated. disentangling these two sources of divergences in financial development should be a priority in the international agenda. second, the search for an efficient and powerful “ financial safety net ” should be pursued. stabilising the demand for international reserves would bring huge benefits in terms of world welfare. at present, reserve accumulation can only occur through a conjunction of balance of payment surplus and some degree of exchange rate intervention. in addition, if sterilisation proves difficult or impossible, it also leads to unwanted changes in monetary policy. precautionary reserve accumulation, however legitimate, unavoidably creates side effects for domestic macro policies as well as spillover effects on other countries. all countries, therefore have a common interest in finding ways to disconnect reserve accumulation from exchange rate management and, more generally, from balance of payment situations and monetary policies. the difficulties, however, are huge. the search for new liquidity sources through, for instance, multilateral mechanisms, meets with an inevitable moral hazard problem. first, to be equivalent to reserves going forward, multilateral liquidity must be available ex ante and without condition. second, there is a danger that fully unconditional liquidity be used to deal with fundamental “ solvency ” imbalances. a delicate balance will have to be struck, either within the framework of current imf facilities, or by setting up new and innovative mechanisms. let me now conclude. i am aware that i have raised more questions than provided answers. i also know that many of the issues i have mentioned are hotly debated and, often quite contentious. this is normal. no one can claim to fully understand the dynamics of the new financial world we shall be facing in the coming decades. we also know that, after a crisis of this magnitude, “ business as usual ” is not an option. the last three years have shown how much countries are mutually dependant on each other. there would be no excuse for inaction and there are, on the contrary, many opportunities for cooperating and building together a better and safer international financial system. thank you.

driving up headline inflation rates globally, prompting concerns about a possible broadening out of these increases into higher inflation generally. in discharge of its primary duty to control inflation, the ecb governing council last week decided to raise rates by 25 basis points. our approach is to take action now to keep inflation expectations in line with the definition of price stability, preserve purchasing power in the medium term and, thereby, support employment and growth across the euro area. it was also made clear, following the increase in rates, that the governing council has no bias regarding future monetary policy decisions, which will be determined by the incoming data. in addition, we pointed to the need to avoid behaviour that might exacerbate the difficulties of the situation, for instance, by attempts to compensate ourselves for a change in the relative price of imported commodities. financial market developments i would like to turn now to financial market developments. as you know, over the past year, there has been a generalised disruption in normal money market operations between banks resulting mainly from uncertainty regarding the extent of losses on complex financial instruments linked to sub - prime mortgages in the us. central banks responded strongly to counteract these adverse conditions in money markets. the ecb, in particular, was in a position to take effective action in the light of the pre - existing arrangements whereby banks had an extensive range of collateral that could be used to access central bank liquidity. these arrangements effectively addressed the problems at the short - end of the money market. however, with questions of transparency and asset valuation remaining, term interest rates continue to be elevated with higher than normal spreads remaining between longer - term rates and official rates. this will only change when confidence is restored among financial market participants. in the medium term, the assessments by ecofin and by the financial stability forum have provided roadmaps for strengthening the resilience of the international financial system. the irish financial sector is not immune to these global developments. medium - to long - term funding is not as readily available on wholesale markets and this has increased the need for banks to focus on liquidity management. while the share prices of irish banks have fallen, it is important to point out that the direct and indirect exposure of irish banks to us sub - prime mortgages is negligible, and there is no sign of a material increase in loan arrears. accordingly, the banking sector here has not experienced the write - down of assets that has required some of their international peers to raise additional capital,