doubling in the value of loans where credit risk has significantly increased since origination, also known as stage 2 assets. and despite these efforts, loan loss provisions of euro area banks, could still be below needs suggested by fundamentals. newly originated loans have also tended to have greater credit risk, with banks reporting a higher probability of default according to their internal ratings - based portfolios in the second quarter of the year. this is in line with results of the ecb ’ s vulnerability analysis. under the baseline scenario, credit losses would continue increasing and the solvency position of the significant euro area banks would deteriorate by mid 2022. moving on, the non - bank financial sector continued to be an important source of financing for companies and thereby helped support the economic recovery. non - banks have absorbed the vast majority of the new debt securities issued by non - financial corporates in the euro area this year – notably also from sectors more sensitive to the economic fallout from the pandemic. at the same time, non - banks also played a more negative role in amplifying the market turmoil this spring. investment funds, including money market funds, experienced outflows of a magnitude last seen during the global financial crisis. this only stopped once the ecb launched its pandemic emergency purchase programme ( pepp ). the pepp indeed proved to be a turning point in financial markets. flows into investment funds turned positive again in the subsequent months, quickly compensating for all the redemptions experienced in february and march. however, these flow dynamics imply that investment funds shed large volumes of assets procyclically, in the first quarter of the year, before becoming a net buyer again once market valuations started to recover. one major reason why investment funds are particularly liable to amplify adverse market dynamics is their structurally low liquidity buffers. low cash holdings force investment funds to sell relatively illiquid assets in the event of outflows, which serves to depress asset prices. although funds temporarily increased their holdings of liquid assets in response to this year ’ s market stress, their cash positions have already returned to pre - pandemic levels. this again leaves the sector vulnerable to large redemptions in the event of any renewed stress in the financial markets. moreover, financial vulnerabilities were aggravated by investment funds continuing to increase their exposure to credit risk. more than three - quarters of the bonds purchased by funds after march 2020 were rated bbb or below. policy

public finance workshop on fiscal - structural reforms opening remarks by banco de portugal governor, carlos da silva costa 1 lisbon, 3 july 2017 good morning ladies and gentlemen, it is a great pleasure to be here today to open this workshop on ‘ fiscal - structural reforms : towards economic growth and the sustainability of public finances ’. on behalf of banco de portugal and the organising team, a very warm welcome to you all! as you are aware, this workshop, hosted by banco de portugal, was organised in the context of the annual meeting away from frankfurt of the working group on public finances of the european system of central banks. the workshop gathers here today an outstanding group of fiscal experts coming from central banks, fiscal councils, and other national and international institutions. let me take this opportunity to reaffirm in particular the importance of fiscal councils and other independent fiscal watchdogs for the pursuit of sound public finances in our countries. global economic activity is gradually recovering. however, structural challenges persist in many countries, including low productivity growth, high unemployment, insufficient levels of investment, high public and private indebtedness as well as weaknesses in the financial sector. how can structural reforms help? these reforms are key to improving long - term economic growth prospects and to reducing our economies ’ vulnerabilities to future adverse shocks. however, it should also be taken into consideration that they may be associated with some negative effects in the short and medium term, as reform implementation is not without economic and social costs. structural reforms may be linked to fiscal policies through various channels. this workshop will focus on a specific subset of structural reforms, namely fiscal - structural 1 version prepared for presentation. www. bportugal. pt reforms. fiscal - structural reforms encompass areas like taxation, social security and pension systems, healthcare, education, justice, the institutional framework and public finance management, among others. they should be distinguished from the standard use of discretionary fiscal policy to fulfil short - to medium - term objectives. the post - crisis period has witnessed a reduction in fiscal imbalances in europe. however, debt ratios remain at record highs and risks to the sustainability of public finances persist in several countries. fiscal space for expansionary policies is limited and further consolidation is needed. against this background, fiscal - structural reforms gain prominence as an approach to improve the efficiency and quality of public finances. indeed, if well designed and implemented, they can support inclusive economic growth, ensuring their long - run sustainability. notwithstanding their potential benefits