jose manuel gonzalez - paramo : non - standard monetary policy : five questions about the exit speech by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, on the occasion of the seminar at the european economics and financial centre, london, 6 november 2009. * * * introduction 1 i would like to thank the european economics and financial centre ( eefc ) for organising this conference and giving me the opportunity to speak in front of such a distinguished audience. this is the second time i have had the honour of participating in the eefc series of seminars ; the first time being back in september 2006. it is always a pleasure to be invited to address an audience again because it allows you to resume the dialogue already started. back in 2006 my speech focused on the many challenges that uncertainty poses for the design of monetary policy. today, i would like to focus on some questions related to the exit from the ecb ’ s non - conventional monetary policy. there is no need for me to recall the start of the crisis in early august 2007, when tensions originating in the us sub - prime mortgage market spread to international money and credit markets, nor its intensification in mid - september 2008, following the filing for bankruptcy protection by lehman brothers. while the full cost of the crisis has yet to be assessed, the output contraction and job destruction observed so far ( as well as the less readily measurable social costs ) have been on a scale unseen for more than half a century. in order to contain the impact of the crisis on the real economy and preserve price stability, central banks have engaged in an aggressive cutting of policy interest rates and have introduced a number of non - standard monetary policy measures. at the same time, governments have adopted large fiscal stimulus measures, while also making vast public funds available to provide support to their banking and financial industries. recent data suggest that the massive response to the crisis by public authorities is bearing fruit. the threat of a continuing free fall in activity in our economies has now receded and there are signs that the global slowdown may be bottoming out. however, the crisis has certainly not come to an end : uncertainty remains high and the economic data remain volatile. based on the information currently available, we expect the recovery to be gradual and, at least in the short term, to continue to rely on a number of temporary factors, such as past discretionary stimulus. even though the crisis is not yet over, during the last year we

leverage of the sector had reached unprecedented heights. however, as analysed in box 7, the recent re - leveraging in the euro area corporate sector has not been broad - based, but rather it has been concentrated among unlisted firms – including not only small and medium - sized enterprises, but also firms which have been de - listed through private equity deals. data is obviously lacking on unlisted firms, but comparing trends in the debt - to - asset ratio for listed non - financial corporations and the debt - to - gdp ratio for the non - financial corporate sector suggests that a sharp rise has taken place in the debt - toasset ratio of unlisted firms in the period since 2004 ( see chart on the left of slide 8 ). increasing corporate sector leverage in the euro area has also begun to raise questions about the likelihood of an adverse turn in the credit cycle and its possible consequences for the financial system. although closely related to business cycles, credit cycles are also driven by the criteria applied by banks and other investors when extending credit. by this yardstick, a long period of inertia in bank lending standards since mid - 2004 and the persistent tightness of credit spreads suggest that euro area firms have not been facing financing constraints ( as shown in the chart on the right of slide 8 ). on the contrary, as banks placed greater emphasis on the so - called “ originate and distribute ” business model, new opportunities have emerged for other financial institutions to acquire exposures to credit. this development has further improved firms ’ access to bank credit. euro area household sector turning to the euro area household sector, the pace of net borrowing by the household sector has slowed since spring 2006, but has remained at high levels ( see the chart on the left of slide 9 ). there have also been signs of moderation of house price inflation in a number of euro area housing markets. the risk of potentially disruptive property price declines in the future appears limited in the euro area as a whole, although differences continue to exist among individual member states. however, concerns remain about the sustainability of unprecedented levels of mortgage - related leverage in those parts of the euro area where, ceteris paribus, housing valuations appear stretched, where the debt build - up has been pronounced, and where the majority of debt is financed at variable interest rates. while measures of leverage compared to income can provide a rough indication of the ability to service debt, it is also important to evaluate the sustainability vis