, these vulnerabilities appear to have combined in unforeseen ways to trigger a very severe episode of deleveraging and reintermediation. while the intensity of the problems across various markets has ebbed and flowed since august, it is clear that this process is still very much ongoing and is likely to persist, at least into the early part of 2008. recent developments in financial markets, such as the temporary closure of the covered bond market, point to a further tightening in liquidity and reinforce the view that there is still some way to go before we see a return to more normal market conditions. uncertainty is likely to remain high and confidence will only return to markets when the impact on larger institutions and, indeed, their responses, becomes clearer. until we reach that point markets may continue to remain fragile and vulnerable to bad news. money market problems and central bank responses i would like to turn now and talk about how central banks have reacted to these developments and what impact this has had. within their sphere of influence, central banks, in general, responded in an unprecedented manner to counteract disorderly conditions in money markets. in particular, the ecb, along with other major central banks moved quickly to meet the increased liquidity needs of the banking system and liquidity management policies since august have been very much focused on, first, restoring, and, then, maintaining calm in money markets. the ecb has been particularly active since the outbreak of turbulence and has used the full range of operational instruments at its disposal. it has added extra liquidity through special overnight and longer - term refinancing operations, as well as through more sizeable injections of liquidity in its main refinancing operations. there have also been changes to the pattern of liquidity provision within the eurosystem, with significant front - loading of liquidity needs to accommodate the demand of counterparties to fulfil reserve requirements early in the maintenance period, and changes to the maturity composition, with much larger weight for 3month refinancing operations relative to 1 - week refinancing operations. i would emphasise that these operations were all conducted within the existing operational framework. in participating in eurosystem liquidity operations, market participants have been able to use a very wide range of collateral to access funding. earlier changes to the collateral framework in particular, have helped in supplying the liquidity needs of the euro markets in a timely fashion. this has added significantly to the flexibility of

about how recent events in financial markets may impact on economic developments. the first point to make is that much depends on how market developments and financial conditions evolve from here and for how long the market turbulence continues. for this reason, it is difficult, at this point, to assess the extent to which activity may ultimately be affected. however, recent developments have not been favourable and increase the risk of a more significant spillover from financial markets to broader economic activity. looking first at channels of transmission, tighter financial conditions could reduce economic activity in a number of ways : for example, through increased credit spreads and higher term funding rates ; through a fall in financial wealth or net worth as a result of the turbulence and, perhaps most importantly, through problems in credit and funding markets impacting on the overall supply of credit. the recent euro area bank lending survey offers some early evidence on the response of euro area banks to the initial turbulence in credit markets. the results show a net tightening of lending standards which is greatest with respect to loans to enterprises, particularly for the financing of mergers and acquisitions and corporate restructuring. we have also seen signs in euro area retail interest rates of some rise in rates charged for personal consumer loans and also for lending to non - financial corporations. on the positive side, the resilience of the euro area economy is helped by the fact that it was growing strongly before the recent outbreak of market turbulence. underlying economic fundamentals remain favourable, with strong employment growth boosting household incomes and corporate balance sheets quite healthy. notwithstanding these supports, however, any marked slowdown in us growth would remove some impetus to activity. while us third quarter growth surprised on the upside, the indications for the quarter are not that favourable. the us housing market, which has been at the root of current problems, continues to deteriorate. this has further heightened concerns about the risk of spillovers to us consumer spending, which has been the main engine of growth in the us economy in recent years. there are some signs that this is now beginning to happen and, if this continues, it is difficult to see how overall economic activity in the us will remain unaffected. in the event of a more significant slowdown in the us, the extent to which global economic activity stays decoupled from us developments remains to be seen. the likelihood must be that it could not remain immune from such developments. more generally, as is the case for the rest of the global economy, the broad repricing of risk and tightening of