the financial sector. however spreads are still high compared to pre - august 2007 levels ( see slide 8 ). even sovereigns have not been immune to the increased credit risk valuations ( see slide 9 ). following the announcement of the rescue packages, the cds - spreads for sovereigns seem to have stabilized. the mandate of the sub - committee is to aim at promoting further the integration and better functioning of eu government bond markets thereby impacting positively on the financial markets as a whole. in relation to issuance terms in this volatile market the bond yields have been declining compared to level in july 2008 ( see slide 10 ). this movement has primarily been driven by a flight to safety. nevertheless the demand for government securities can be quite volatile. the latest round of financial turmoil has indeed lead to pronounced increase in the volatility both in the stock and bond market ( slide 11 ), which from an issuers standpoint makes it difficult to manoeuvre in terms of coming out with timely issuances in such an unpredictable market environment. in addition increased credit risk and demand for liquidity have widened the yield spread to german government securities and thereby aggravating the relative issuance terms for other emu - countries ( see slide 12 ). under the assumption that the yield spread between member states purely can be explained by differences in credit risk and liquidity, one may use prices on credit default swaps ( cds ) as an approximation for the credit risk premium. the liquidity risk may then be defined as the residual of the yield spread after deducting the credit risk premium ( see slide 13 ). the calculation shows that the widened yield vis - a - vis germany in 2008 compared to 2007 is predominately caused by increased credit risks. the financial turbulence has elucidated the role of the government securities as safe havens ( see slide 14 ). under normal market conditions the swap market may function as a substitute for government securities especially in terms of it's virtues in regards to pricing. however the increasing credit and liquidity premiums imply that this type of substitution is no longer valid. market conditions in general banks are under pressure. they experience rising funding costs and declining market value ( see slide 15 ). the capacity of the balance sheet is constrained making it more difficult to handle the intermediation phase between issuers and end - investors. in addition, the constrained balance sheets combined with increased volatility have lead to widened bid offer - spreads in the secondary government

factor in decisions about housing versus equities, direct versus portfolio approaches, and onshore versus offshore investments. from this individual point of view, housing - heavy investors may look to be acting rationally. in particular, capital gains on housing assets are usually tax exempt, while those on financial assets are often not. in addition, households can negatively gear investment properties so a loss is created, which can be deducted from income for tax purposes. but it is not the purpose of this speech to examine the implications of tax policy for household decision - making. i focus here on the wider concerns - the implications of holding too many eggs in one basket, the exposures generated by gearing decisions, and the lack of ready access to local equity by new zealand firms. there are specific difficulties interpreting the data on equities. in particular, new zealand is a country of small firms and farms, almost all privately owned, most of them through families. an important form of debt is mortgage financing on the owners ’ house ( s ). this raises the statistical complication that the household sector holds more equity than is initially apparent. an additional complication comes from the inconsistent treatment of family trusts, and the assets held by them. we estimate that about 15 percent of households now hold assets through family trusts. furthermore, globalisation is complicating things considerably. our official data on offshore equity holdings by new zealanders probably under - estimates the real situation. statistics new zealand surveys new zealand resident institutions as to their offshore holdings and bases their measure of direct holdings on ird returns. as a result, offshore holdings of private equity and equity paying low dividends are unlikely to be fully captured. migrants into new zealand pose particular measurement challenges, especially when they retain ownership interests in offshore operations where they continue to have family or corporate ties. of course the government itself has significant holdings of equity and it would be rational for householders to take these into account in their savings decisions. through various crown financial institutions, and in particular the new zealand super fund, the government indirectly holds about $ 600 million of new zealand equities onshore and about $ 1, 800 million offshore. through its state owned enterprises and holdings in air new zealand, it holds another $ 10 billion directly. local government also holds significant equity positions. there are three particular types of corporate in new zealand that have been untouched by foreign ownership because their form and modus operandi prevents this. they include state owned enterprises, and other government companies