benoit cœure : global liquidity and risk – a re - interpretation of the recent crises speech by mr benoit cœure, member of the executive board of the european central bank, at the bis - ecb workshop on global liquidity and its international repercussions, frankfurt am main, 6 february 2012. * * * i wish to thank roland straub for his contributions to the speech. i remain solely responsible for the opinions contained herein. 1. introduction i am delighted to deliver the dinner speech today at this bis and ecb workshop on global liquidity. our two institutions have worked closely and extensively on the topic of global liquidity in recent years, notably in the context of basel - based organisations, such as the committee on the global financial system, so it made sense for us to organise a workshop on this subject. on a more personal note, as a former co - chair of the g20 sub - working group on global liquidity management, i am particularly pleased to see that work is progressing on this important issue. the global economic and financial crisis in 2007 – 08 forcefully demonstrated that fluctuations in global liquidity conditions can lead to distortions in asset prices and cross - border capital flows. these distortions contribute to the emergence of bubbles and to financial crises when the bubbles burst. this is not a new story, but a recurrent theme in modern economic history. in this regard the recent financial crisis has not really been exceptional. liquidity, no matter how defined, is widely understood to follow cyclical patterns. these patterns feature one important element which is not yet sufficiently appreciated and which i would like to stress today, namely the self - reinforcing interaction between risk appetite and liquidity. this particular interaction ultimately determines the relationship between the official and the overall level of global liquidity. in this connection, i should perhaps add that claudio borio and his colleagues at the bis were among the first to note this self - reinforcing interaction and introduce the concept of the risk - taking channel. 1 this evening there are several things i ’ d like to consider : i ’ ll outline some of the key concepts in global liquidity and also cover liquidity cycles. i ’ ll talk about the interaction between liquidity and risk appetite in the asian crisis, and between liquidity and the recent financial crisis. i ’ ll discuss the relationship between global liquidity and the availability of safe assets, and the impact of the post - lehman global liquidity cycle on

its act together and is playing catch - up. this is perhaps why the economist recanted two years ago, and blazoned an altogether different message on its front cover in december 2011, this time titled ‘ africa rising ’. the titles have become even more positive ever since, with its march 2013 issue talking about ‘ aspiring africa ’. let me quote the introductory paragraph from the latter just to give you the flavour and a sense of the changing times. “ celebrations are in order on the poorest continent … life expectancy rose by a tenth in the past decade and foreign direct investment has tripled. consumer spending will almost double in the next ten years ; the number of countries with average incomes above $ 1, 000 per person a year will grow from less than half of africa ’ s 55 states to three - quarters. ” bis central bankers ’ speeches how times have changed! how very sporting of the economist to recognise and celebrate this changing sentiment towards africa. which rather reminds me that the economist had meted out a similarly harsh treatment to mauritius, but without any subsequent recantation. it was in the late 1980 ’ s, if memory serves me right. we had stabilised the economy, consolidated public finances with austerity and wage restraint, strengthened the sugar sector, tourism and export manufacturing, and changed governments through free and fair elections – as has always been the practice since independence, and started offshore activities. we were doing quite well, one would have thought. the world bank certainly thought so : its country report on mauritius had the tell - tale title “ managing success. ” the economist, however, took a more jaundiced view, buying the myth that mauritius was rolling out the red carpet for money launderers. it carried a short article, with the admonishing title “ a naughty way to salvation. ” it was well - hidden in an inside page – no cover page on the economist for small - island states unless they have been particularly naughty like cyprus, or iceland before it. maybe it ’ s high time for the economist to make some amende honorable... the african narrative has got a rush of superlatives going. “ lions on the move ”, trumpeted a mckinsey study on the continent. as their largest trading partner, the eu is mired in recession this year, mauritians can count their blessings as their country happens to be in one of the fastest growing regions of the planet : east africa will grow