seek public bridge financing. overall, i welcome the agreement as a step forward toward eliminating the negativefeedback loops between banks and sovereigns. financing of the real economy let me turn to the second issue. bis central bankers ’ speeches a key characteristic of the euro area economic recovery is the decline in loans to the private sector. this situation applies at both the euro - area and, in many cases, the individual - country levels. because the euro - area economy is bank - based, bank lending is especially significant for smes, which produce the bulk of goods and services. consequently, a credit contraction raises the question : can the recovery be sustained in the presence of negative loan growth? a number of actions and initiatives are addressing this issue. i will confine my remarks to two areas. the first concerns monetary policy. throughout the crisis, the ecb has put in place both conventional and unconventional policy measures with the objective of increasing confidence and restoring the smooth operation of the monetary transmission mechanism. the volume of credit would have contracted significantly more had it not been for the ample provision of liquidity to european banks by the eurosystem. the declining path for real interest rates, suggested by the fact that inflation expectations are anchored close to 2 % in combination with the ecb ’ s commitment to keep an accommodative monetary policy stance, will lead to a substantial increase of the demand for credit along the way. there is, however, still work to be done on the supply side of financial markets. this circumstance brings me to the second area that deserves attention, i. e. the need to restore confidence in the banking sector. confidence has been undermined by the perception that some banks have been holding assets of questionable quality on their balance sheets. the resulting credit and counterparty risk has contributed to a rise in funding costs, preventing some banks from on - lending to the private sector. supervisors, at both the european and individual country levels, are using tools – including stress tests, asset quality reviews and transparency exercises – to assess the resilience of banks and to request injections of capital, so that confidence in the quality of bank balance sheets can be restored. in this context, the establishment of the ssm and the comprehensive assessment taking place will provide a catalyst for the cleaning - up of balance sheets to take place more quickly and more comprehensively than would otherwise have been the case. the repair of banks ’ balance sheets is unavoidable and will, of necessity, involve

the previous erm. the notion of asymmetry is particularly important in underlining the principle that it is the country whose currency comes under pressure that has to undertake the necessary policy adjustments. let me now return to the case of the drachma and the erm. by the time that the drachma entered the erm, in march 1998, the participating countries had demonstrated their determination to form a monetary union by attaining considerable nominal convergence, as specified in the maastricht criteria. this convergence took place under a backdrop of market - based economies that could compete effectively in an open economic and financial system. in these conditions, the system built up a considerable amount of trust. as otmar issing has pointed out in several recent papers, the trust evoked by governments, including in their ability to deliver credible, non - inflationary policies, is a prerequisite for the existence of a stable currency, both internally and externally. when the drachma entered the erm, it became a beneficiary of the credibility established in the system over the previous years. it also benefited from the market ’ s knowledge of the availability of the system ’ s mutual support facilities, such as the very short - term financing facility. yet, greece ’ s participation was not a free ticket. the other participants in the system did not wish to endanger the credibility that had taken so long to achieve. they rightly asked for an entry fee. this fee included the following elements. • the new central rate - which as i have noted, involved a 12. 3 per cent devaluation - had been agreed by all members. • the devaluation of the drachma was both backward looking and foreward looking. the magnitude of the devaluation took account of both past inflation differentials between greece and other eu countries and prospective differentials in the period leading up to greece ’ s expected entry into the euro area. thus, the new central rate was meant to be sustainable. • a package of supportive fiscal and structural measure was announced. efforts to restructure public enterprises were stepped up. the aim of the measures was to ensure the sustainability of the drachma ’ s new central rate. in other words, the erm was meant to be a testing phase for emu participation, not a free pass into the euro area. unlike many other devaluations of the mid - 1990s and late - 1990s, the drachma ’ s devaluation