that the most recent triennial survey of the bis showed that the credit derivatives market has witnessed substantial growth, from usd118 billion in 1998 to usd52 trillion in 2007. the main participants in credit derivatives, comprising about 80 per cent of the total market, are banks and hedge funds. the announcement of losses by hedge funds exposed to us sub - prime mortgages in midjuly 2007 triggered the reappraisal of asset prices, and excessive market volatility with a general flight to quality or less riskier assets. credit risk evolved into liquidity risk and banks struggled to obtain funding as interbank liquidity dried up, causing sharp increases in moneymarket rates in the major financial centres of the world. 3. how deep and widespread? what began as a fairly contained deterioration in portions of the us sub - prime market has evolved into severe dislocations in broader credit and funding markets that now pose risks to the global macroeconomic outlook. in april 2008, the international monetary fund ( imf ) estimated that declining us house prices and rising delinquencies on mortgage payments could lead to aggregate losses related to the residential mortgage market and related securities of about usd565 billion, including the expected deterioration of prime loans. adding other categories of loans originated and securities issued in the us related to commercial real estate, consumer credit market and corporations, total losses are estimated at almost usd1, 0 trillion. tighter credit conditions imposed by banks, the erosion of consumers ’ spending power due to rising inflation and continuous increases in energy costs have impacted severely on the us economy. according to the imf, the continuing correction in the us housing market and the unresolved problems in the financial sector have led the us economy to the verge of recession. the imf has downgraded its forecast for gdp growth in the us in 2008 to 0, 5 per cent, while the fed, in its latest fomc minutes released on 22 may 2008, expects the us economy to expand by between 0, 3 and 1, 2 per cent. this has serious implications for global growth, particularly for countries whose economic performance depends heavily on exports to the us. one of the interesting developments i would like to mention is that, whereas previous crises originated from emerging - market economies, developed markets were essentially the epicentre of the crisis. so far emerging markets have also proved relatively resilient to the financial turmoil. improved fundamentals, abundant reserves and strong growth rates have all helped to sustain flows into emerging

little incentive to reduce debt and measures that could have strengthened government budgets can be postponed. firms that are not making money can continue to operate. monetary policy in europe has been stretched to its limits. what monetary policy can do is to build a bridge – from the old economy in crisis to a new economy. but someone else – and something else – must create solid ground on the other side. otherwise, the bridge will be left hanging in mid - air. keynes would probably have supported the ecb ’ s policy. without countermeasures, a crisis can become a catastrophe. a slower process of economic restructuring may be a reasonable price to pay. europe is again seeing a modest pick - up in economic growth. unemployment has reached the peak and is falling in countries such as germany, ireland and spain. it is a slow process and the ordeal can seem unnecessarily protracted, but at least things are moving in the right direction. can the crisis in europe be curbed? the answer is probably yes, provided authorities succeed in establishing a form of coordination that has so far been absent. at a deeper level, there is a need for structural and institutional reforms. such reforms will take time. immune system the situation in europe illustrates how difficult it can be to curb a crisis once it has arisen. it might therefore be wise to give priority to crisis prevention. a healthy economic system is less vulnerable. crises can be curbed – or even avoided – by boosting the resilience of the economy. rather than treating the disease after it has taken hold, much can be accomplished by strengthening the economy ’ s immune system. the financial crisis revealed deficiencies and system failures worldwide. many governments and households had taken on too much debt. us investment banks such as lehman brothers operated a high - risk business model with low levels of equity. european banks were too dependent on short - term funding in international markets. in a period of growth, it is easy for banks to obtain funding. but the system is fundamentally unstable. without adequate capital requirements in the banking system, credit growth can spiral out of control. hayek gave lectures on this topic at the london school of economics in the early 1930s. 4 the lse is still home to many economists who argue against the risks of debt - financed growth. 5 solid banks are built in good times. solid banks bolster the resilience of the economy and make crises easier to manage. since the financial crisis, the g20 countries have