##ly important the targeted reduction of the deficit as a proportion of gdp is achieved on or even before schedule. progress in this regard, combined with further improvements in the competitiveness of the economy, and a restoration of a functioning banking system, are the cornerstones to recovery. recent developments in financial markets point to an increased recognition that ireland is taking the right steps to achieve a return to sustainable growth and balanced public finances. the task now is to maintain the momentum behind all the necessary adjustments required to move the economy out of its current difficult situation. progress on these fronts will help to increase the resilience of the economy to change in the external environment and move decisively towards a situation in which households can look forward to modest but steady increases in real incomes and living standards. bis central bankers ’ speeches eu - imf programme banking as well as fiscal and other aspects of economic policy are, of course, being conducted in the context of the policy package agreed for the eu - imf programme. but it would be a mistake to exaggerate the degree to which this package represents a different course from that which irish policymakers would otherwise have chosen. consistent programme compliance by ireland, as has been confirmed in the three reviews by our external partners – the eu commission, the ecb and the imf ( in january, may and, most recently, in july ) – is thus not only the key to restoring market confidence ( and ensuring release of programme funding ), but signals important steps towards rebalancing and strengthening the economy towards a recovery of activity and especially employment. under all three reviews ireland has been deemed to be on track in relation to all the quantitative macroeconomic targets and the structural benchmarks. in particular, the banking strategy is proceeding as scheduled. the financial sector reforms include the restructuring, recapitalisation, and the deleveraging of the banks. all of the structural benchmarks have been observed here too, with some achieved ahead of schedule. in fact, the third review and assessment, which took place in july, is being discussed at the imf executive board and at the european councils today, and following the board ’ s and councils ’ approval, the next tranche of funding will be issued. mortgage arrears of course the vast majority of irish borrowers will continue to meet their commitments in servicing mortgage and other debt, albeit under more difficult circumstances. it is only on that basis that economic recovery – requiring, as it does, the progressive restoration of credit and finance

brought both money markets and credit markets under pressure. second, the forex market came under pressure because of reversal of capital flows as part of the global deleveraging process. simultaneously, corporates were converting the funds raised locally into foreign currency to meet their external obligations. both these factors put downward pressure on the rupee. third, the reserve bank's intervention in the forex market to manage the volatility in the rupee further added to liquidity tightening. now let me turn to the real channel. here, the transmission of the global cues to the domestic economy has been quite straight forward – through the slump in demand for exports. the united states, european union and the middle east, which account for three quarters of india's goods and services trade are in a synchronized down turn. service export growth is also likely to slow in the near term as the recession deepens and financial services firms – traditionally large users of outsourcing services – are restructured. remittances from migrant workers too are likely to slow as the middle east adjusts to lower crude prices and advanced economies go into a recession. beyond the financial and real channels of transmission as above, the crisis also spread through the confidence channel. in sharp contrast to global financial markets, which went into a seizure on account of a crisis of confidence, indian financial markets continued to function in an orderly manner. nevertheless, the tightened global liquidity situation in the period immediately following the lehman failure in mid - september 2008, coming as it did on top of a turn in the credit cycle, increased the risk aversion of the financial system and made banks cautious about lending. the purport of the above explanation is to show how, despite not being part of the financial sector problem, india has been affected by the crisis through the pernicious feedback loops between external shocks and domestic vulnerabilities by way of the financial, real and confidence channels. how have we responded to the challenge? let me now turn to how we responded to the crisis. the failure of lehman brothers in midseptember was followed in quick succession by several other large financial institutions coming under severe stress. this made financial markets around the world uncertain and unsettled. this contagion, as i explained above, spread to emerging economies, and to india too. both the government and the reserve bank of india responded to the challenge in close coordination and consultation. the main plank of the government response was fiscal stimulus while the reserve