capital buffers to continue providing key financial services and absorb losses while avoiding abrupt and excessive deleveraging that would be harmful to the economy. the support from governments and prudential authorities together with the ecb ’ s monetary policy measures has preserved financial stability so far and ensured a smooth flow of credit to the economy. although policy support has been successful in containing immediate financial stability risks, medium - term vulnerabilities remain high. the pandemic has amplified pre - existing imbalances and created new challenges. for example, the profitability outlook for banks remains weak as lower - for - longer interest rates dent margins and structural challenges persist. in addition, corporate sector vulnerabilities have increased, and higher corporate default rates are to be expected once policy support measures are withdrawn. this would lead to the quality of banks ’ assets deteriorating, resulting in another challenge for these institutions in the coming period. the forceful response of fiscal, monetary and prudential authorities has reduced the economic and social costs of this crisis and created a virtuous circle between sovereigns, banks and corporates. the measures introduced have stabilised demand, ensured the flow of credit to firms, avoided a wave of corporate defaults and protected banks ’ balance sheets. however, they have also increased interdependencies among various parts of the economy, which could lead to the emergence of a negative feedback loop between existing vulnerabilities. authorities therefore face a delicate balancing act. on the one hand, an early withdrawal or scaling back of support risks triggering a wave of insolvencies that would have a large impact on the economy and banks ’ asset quality. on the other hand, providing public support and low financing costs for too long may result in unviable corporates being kept alive to the detriment of banks ’ viability, economic productivity and, by extension, economic growth. 2 / 3 bis central bankers'speeches at the moment, risks from the early withdrawal of policies are higher than the risks associated with keeping support measures in place. we need to preserve the virtuous circle we have created. however, any negative longer - term effects from keeping support measures in place need to be carefully and continuously monitored. conclusion in the short term, all stakeholders, particularly fiscal ones, must keep complementing our accommodative monetary stance. if we want a timely recovery in europe, we have to avoid any cliff effects from the premature scaling back of these policies. it is therefore of

benoit cœure : the euro area sovereign debt market : lessons from the crisis speech by mr benoit cœure, member of the executive board of the european central bank, at the 12th imf annual forum on managing sovereign risk and public debt : “ managing sovereign debt : a seismic shift in demand and supply dynamics? ”, rio de janeiro, 28 – 29 june 2012. * * * i wish to thank maximilian freier and wolfgang lemke for their contribution to this speech. i remain solely responsible for the opinions contained herein. mr deputy managing director, ladies and gentlemen, it is a great pleasure to speak to you here today at the 12th imf forum on managing sovereign risk and public debt. clearly, this topic has never been more relevant than today. in my remarks today, i will focus on the experience in the euro area and consider the following three questions : first, what has characterised the pricing of sovereign credit risk over the last two decades? second, what is the relevance of the sovereign debt market tensions for monetary policy? and third, what lessons have we learnt? what has characterised the pricing of sovereign credit risk over the last two decades? let me start with the first question, the pricing of sovereign risk. looking at the sovereign debt markets of the euro area over the past two decades, it is possible to clearly distinguish three main periods. they all display distinct patterns of government bond pricing. 1 first, there was the run - up to economic and monetary union ( emu ), that is especially the period of about five years before 1999, when the euro was introduced. during this time, sovereign bond yields quickly converged towards those of german bunds. much of this convergence is explained by the elimination of exchange rate and inflation risks. in addition, european governments made great efforts to reduce their deficit and debt levels in order to fulfil the maastricht criteria and join the common currency. in the second period, ranging from the introduction of the euro in 1999 to the collapse of lehman brothers in september 2008, government bond yields remained at moderate levels and did not differ much from country to country. the yield spreads of ten - year government bond yields vis - a - vis german bunds reached a maximum of about 70 basis points, and recorded about 15 basis points on average. 2 these observations raise some questions : why did this period see such an undifferentiated pricing of government debt securities? and were the “ macroeconomic fundamentals ” character