emerging economies. finally, i ’ ll explore some of the policy implications. 2. key concepts in global liquidity the landau report of the cgfs has pointed out that global liquidity has two separate, but interdependent, components. the first component can be labelled as “ official liquidity ”, and can be defined as “ the funding that is unconditionally available to settle claims through monetary authorities ” 2. official liquidity can be generated through various instruments. central banks can create it in their domestic currency through regular monetary operations or see borio and zhu, 2008, “ capital regulation, risk - taking and monetary policy : a missing link in the transmission mechanism? ”, bis wp no. 268. cgfs paper no 45 : “ global liquidity – concept, measurement and policy implications ”, basel, 2011. bis central bankers ’ speeches through emergency liquidity assistance. in addition, authorities can provide official liquidity in foreign currency by selling foreign exchange reserves and through swap lines between central banks. the other component is private ( or private sector ) liquidity. private liquidity is created to a large degree through cross - border operations of banks and other financial institutions, and increasingly within the shadow banking system. in normal times, private liquidity dominates official liquidity. but private liquidity is highly procyclical and highly endogenous to the conditions that prevail in the global financial system. the inherent endogeneity of private liquidity means that it can easily evaporate in times of financial stress. the pro - cyclicality is documented via the strong interaction of private liquidity and the global risk appetite of financial institutions. indeed, the global risk appetite is one of the main determinants of the multiplier that links levels of overall liquidity to levels of official liquidity. consequently, while only central banks can create official liquidity ( the imf can only mobilise it and reallocate it across countries ), for global liquidity cycles to emerge there is no need for new injections of official liquidity. what is needed is that private or official investors reallocate existing liquidity to other market segments. and when viewed in this light, the true driver of liquidity is the underlying set of factors that allows this portfolio reallocation to take place. let me explain. 3. relationship between liquidity and recent crises a glance at the history of global capital flows over the last 20 years suggests that the

##d economic climate, and upswings in asset prices to unsustainable levels. this resulted in the “ great recession ” and the corresponding fall in global economic activity. the ensuing sovereign debt crisis in the euro area can be seen – at least to some extent – through the lens of global liquidity and its cycles. in an environment of abundant liquidity and high risk appetite, sovereign yields in the euro area converged at very low levels. government bond spreads did not reflect differences in macroeconomic fundamentals. this distorted incentives, both in the public and the private sectors. sovereigns over - borrowed and put off necessary reforms. in some member states it was the private sector that took on excessive debt, fuelling unsustainable real estate bubbles which, when they burst, pulled the banking system down and then affected public finances. in other words, abundant liquidity undermined market discipline, which could otherwise have become an important pillar of macroeconomic and fiscal discipline in the euro area. 4. shortage of safe assets and global liquidity there is also a striking link between the global liquidity cycle and the shortage of safe assets in the global economy. let me elaborate. financial crises, but also economic downturns in general, trigger a rise in global risk aversion. this in turn induces a flight to safety by global investors, resulting in an excess global demand for safe assets. as an illustration, think of the current nominal yield on some short - term sovereign debt, which is close to zero and has even turned negative in some constituencies. the consequent shortage of safe assets globally, however, is a significant impediment to the functioning of the global financial system. how can we, as policy - makers, address this recurrent problem? first, emerging market economies should develop an efficient financial system and sound legal, regulatory and macroeconomic policy frameworks in order to create safe, globally accepted financial assets. second, the euro area needs to regain its role as a global supplier of safe assets. some investors have doubted whether the sovereign debt issued by some euro area countries can be considered as risk - free. however, by restoring fiscal discipline, euro area sovereign debt will be viewed once again as risk - free. we have made significant progress in the last couple of years, with the establishment of the efsf, the launching of the esm, the approval of the six - pack legislation and of the fiscal compact. third, the unused resources of the international