flows and in financial markets. this is impacting financing conditions, with feedback to economic activity. the third channel through which shocks are being transmitted is commodity prices. spikes of volatility in the already elevated levels of commodity prices are stoking inflationary pressures in some of the emes and complicating macroeconomic management in the face of slowing growth. among the drivers of commodity prices is accommodative monetary policy in advanced economies. abundant liquidity is bis central bankers ’ speeches adding pressures to commodity prices. the negative outlook on growth should have driven down prices, but that has not been evident so far to any significant extent. fourth, macro - financial loops could come into play as another channel of transmission of shocks. rising credit risks due to deterioration in asset quality could impair the capital of banks or even render it insufficient. this could trigger a cascade of deleveraging with attendant real economy consequences. by far, the most important channel of transmission is the confidence channel which could hurt investment and growth prospects in emes – when confidence is hit, even strong fundamentals do not matter. 6. the probability that all these channels become active and feed on each other is quite high. the impact on an eme depends on its objective conditions and on which channels become most active in its case. thus, the crisis could affect different emes differently. but what is common across emes is that their growth momentum will be interrupted if the current global problems are not resolved quickly. market signals 7. in trying to reach a solution, it is important to recognize what the markets are signaling, even though, admittedly the basis of some of these market engendered fears may not be objective. let me illustrate with a metaphor from physics. it is well known that einstein could not reconcile to the probabilistic nature of quantum mechanics all through his life. he famously said : “ god does not play dice. ” less well known perhaps is the retort of his friend and mentor niels bohr who said : “ albert, stop telling god what he can or cannot do. ” similarly, it is possibly the case that all market signals are not objective. but as policy makers, we cannot presume to tell the market how to behave. we have to take market signals as given. the policy decisions that we take will be more effective if they are seen to be endorsed by markets. 2008 and 2011 8. to understand the situation today, let us throw back to the global

to adjust to the external environment. facing the outbreak of crisis in the euro area was relatively painless. yet, it does not mean that the risks have passed. the forecasts for 2012 are also marked by uncertainty and potential adverse effects of the events related to the euro area crisis. given the generally unfavorable expectations for the european economy, the growth prospects of the countries in the region are also uncertain and accompanied by downward risks, considering the relatively close trade relations with the european union. the lower external demand, along with the lower capital flows to the region, creates a need of proper adjustment of the domestic demand aimed to ensure sustainable external position. therefore, some countries will need fiscal consolidation. the growing european debt crisis, the series of downward revisions of credit ratings of several international banks, the volatility of stock markets and the uncertainty clouding the future developments undermined the confidence of investors, in global terms, thus making the issue of deficit financing more pronounced and being treated more prudently. bis central bankers ’ speeches besides the macroeconomic performances, the attention has been and will be focused on the financial stability. the new risk to the financial sector triggered by the european debt crisis is either direct or indirect exposure to the greek debt and the subsequent potential losses. the second risk is attributable to the reduced availability of funding from foreign parent banks, when some of them face the need of recapitalization that refers to additional risks to the intensity of credit activity in the countries from the south - eastern europe, particularly those where borrowings from foreign banks played a significant role in the establishment of credit potential. the third risk is induced rather by the effects of the global developments on the gradual deterioration of macroeconomic performances of the economies in the region, and resulted in impairment of the credit portfolio quality of the banking system, which has undoubtedly affected or will affect their future activities and performances. let me summarize the first point – the region has successfully dealt with the euro area crisis so far, but the risks remain. many issues are still open and accordingly, the alertness of policy makers has to remain high. what are the lessons learnt from the crisis? the financial crisis shifted many traditional views in the economy, including the role and the objectives of monetary authority, where besides the conduct of monetary policy and the concern for the price stability, there is an obvious need for more active engagement of the central banks in the maintenance of financial stability in the economy. the period of crisis worldwide