7, on the propagation of the sub - prime shock to other markets. market adjustment is still ongoing. nevertheless, i would like to highlight four areas that are also pertinent to the issues of financial integration and development we are discussing. • first, the underlying causes and triggers are to be found in the price dynamics of the us housing market and the excesses and shortcomings ( in the practices ) in the us sub - prime mortgage market. so, a main determining factor of the financial market turbulence is that same one – property price overvaluation – that characterised previous episodes, as emphasised by kenneth rogoff. • second, weaknesses in the functioning of the market for structured finance products. these included valuation uncertainties due to the complexity of many products, the imperfect information available about the underlying asset characteristics, inadequate appreciation by investors of the embedded risks, and excessive reliance on the ratings of such products by credit rating agencies. • third, weaknesses in the implementation of the “ originate - and - distribute ” model by banks and in the chain of distribution and acquisition of credit risks. these shortcomings included inappropriate incentive structures for banks, as well as other financial entities and agents in the securitisation process, which fostered moral hazard and contributed to the inadequate assessment and management of credit and funding - liquidity risk. • fourth, the role and features of new financial entities – the off - balance sheet conduits and structured investment vehicles ( sivs ) – which were linked to banks through management and financing, and played a key role in the transmission of tensions from the structured finance product markets to the money markets, as a result of the maturity mismatch on their balance sheets and the associated funding liquidity risk. the creation of these investment vehicles and the associated substantial off - balance sheet exposures of banks to the structured credit products was the unintended consequence of regulatory arbitrage, and reflected the poor assessment and management of the funding and market liquidity risks as well as the reputational risks faced by a number of banks. overall, the weaknesses in the functioning of the financial system revealed by the financial market turmoil lead to the general conclusion that financial integration and development have not been accompanied by adequate appreciation of risks, effective risk management and sufficient market discipline. the divergence between financial development, on the one hand, and sufficient discipline and effective risk management, on the other, should be bridged. this should be done not by measures that stifle financial innovation

is equal to 2¼ percent. this might be considered a generous assumption. and let us also assume that government revenues keep pace with economic activity so that the revenue ratio is unchanged. under such assumptions, a complete freeze on government spending would reduce the euro area government deficit by around 1 % of gdp each year, bringing it close to balance no sooner than 2016. a more timely fiscal adjustment would require the adoption of corrective measures already in 2010, absolute spending cuts in real terms or additional tax increases. concluding remarks to conclude, the scale of the challenge for fiscal policy is considerable. over the past 12 months, governments, like central banks, have taken unprecedented action to restore stability to the financial system and to tackle the largest recession in post - war history. this action was largely justified. but most governments will come out of this crisis with the highest debt levels, as a proportion of gdp, ever to have been experienced in modern history. and this at a time, lest we forget, when the fiscal burden associated with population ageing looms ever larger over the horizon. if confidence in future stability is to be ensured, now is the time to set out an effective fiscal exit strategy.