immune from loss - sharing ) large banking outflows and spreads exceeding five per cent made recourse to official assistance inevitable. ( figure 3 shows the plot with some relevant news stories flagged ). perhaps the most significant take - away from the sequence of spikes and troughs is the fact that some of them clearly relate to news that is country - specific, some of them to euro area general news. the same is doubtless true for all of the stressed sovereigns. default risk vs. devaluation risk vs. redenomination risk it ’ s worth pausing to recall that raw sovereign spreads such as we are seeing today in the euro area are not remotely unprecedented in pre - euro history. on the contrary, they were the norm as is illustrated by figure 1. the difference is that these spreads reflected a combination of default risk and currency risk. during the last fiscal crisis of the 1980s irish sovereign spreads ballooned out also. but that was for local currency denominated debt. eurobond borrowing by the irish government remained at fairly tight spreads despite the high overall debt ratio ( higher than today ), and the fact that almost half of the national debt was denominated in foreign currency. the high spreads reflected devaluation expectations and currency risk generally. and there were devaluations, though less than was baked into the spreads – by between 250 and 300 basis points on average during the last ten years of that ill - fated regime, the narrow - band ems. it is not that default and devaluation are close substitutes ; not at all, and for several reasons. for one thing, default has potential reputational consequences for the issuer qualitatively different to those of devaluation. in addition, though, devaluation affects not only the international value of the government ’ s debt promises, but also that of all other contracts denominated in local currency ; as a result, depending on the speed of price - resetting ( pass - through ) it can affect competitiveness throughout the economy. these differences have not been sufficiently emphasised, i feel, in recent discussion. as an example, i could mention the irish devaluation of august 1986. the main goal of this important action was restoration of wage competitiveness, not a lowering of the real value of the local currency - denominated debt. ( indeed, i recall that some domestic policymakers were confused on this point and thought that the debt burden would actually increase as a

loan - to - income or loan - to - value limits. the flexibility of the framework enable banks to take individual borrower circumstances into account. there is an ongoing public debate as to the impact the mortgage measures might have on the demand for owner - occupied housing. but prices have risen substantially, and are now back to 2005 levels in nominal terms, or 2003 in real terms. so the demand is there. what is needed is a sustainable level of supply. supply has started to respond, but it ’ s still below estimates of what is needed. 33 the fact is, a higher level of credit by itself will not build more homes. however it risks the re - emergence of a credit price spiral. if supply is not responding to prices, then any move to increase the level of credit is likely to lead to higher housing costs and higher indebtedness. even if supply were to respond more strongly than we expect, new homes take time to build. we could see a rapid spike in prices, followed by an equally rapid decline. higher indebtedness also brings with it more risk. as i ’ ve discussed today, a lot of demand for housing in ireland comes from people who have moved to find work. ireland ’ s position as a small, open economy means that we are more vulnerable to structural shocks emanating from abroad. 34 it is important that households and borrowers are resilient to shocks that can have quite large, sudden effects on irish employment and wages. we need to ensure that if such a shock does occur, it does not trigger a repeat of 2008. the five years up to 2008 saw the same kind of growth rates we are seeing now. over that time, house prices grew by over 40 per cent for example. 35 the difference is that with that growth came an unsustainable increase in credit. the subsequent crisis dramatically reduced the demand for housing, and over - indebted irish households were left ‘ holding the bag ’, as it were. many of these households had taken on very large debts in order to be competitive in the home purchase market. this was the credit price spiral that mortgage measures today are trying to prevent a re - emergence of. many of these households were financially devastated, indeed continue to struggle, even today. households in mortgage arrears was one effect of the credit price spiral. recall, that in september 2013, one in eight private home dwelling loans were more than three months in arrears on their repayments