measures that will improve the budgetary situation in coming years. painful as they are, these measures are necessary to restore confidence, to deal with financing concerns and to underpin the medium - term growth potential of the economy. the banking sector internationally, the functioning of the financial system has improved somewhat in recent months, largely as a result of government and central bank support. nonetheless, vulnerabilities remain and financial conditions are tight. against this background, funding conditions remain very challenging for irish banks and this is reflected in their significant recourse to the eurosystem, which is of particular value to the country at this time. domestically, the contraction in the real economy and a continuing weak property market have meant that banks have incurred substantial loan impairments. in addition, earnings are likely to remain relatively subdued in the near term because of higher loan provisions, increased funding costs, the pass - through of lower ecb policy rates and competition for deposits. overall, our banking system, similar to those elsewhere, continues to face significant challenges. however, the inherent problems that need to be addressed are much clearer now, and significant actions are being taken to help the system recover. the government through the various steps that have been taken has shown its commitment to do whatever is necessary to support financial stability. our approach has broadly followed a similar path to others. the introduction of a state guarantee for bank liabilities was taken to stabilise the funding situation. under this scheme, the authorities significantly increased their engagement with each covered institution and this permitted the authorities here to move quickly to recapitalise the main domestic banks in order to ensure their viability, to support the supply of credit to the real economy, and to address market participants ’ requirements for banks to maintain higher core tier 1 capital ratios than before the crisis. during this time, it was necessary to take anglo irish bank into public ownership to protect the stability of the wider financial system. most recently, the authorities have addressed banks ’ non - performing assets through the decision to establish the national asset management agency ( nama ) and have decided to put in place a new regulatory system. irish banks have substantial exposures to land and development loans, which creates uncertainty about their capital positions, and ultimately affects their ability to provide credit to the real economy. nama will remove these problem assets from banks ’ balance sheets, thereby renewing confidence in the irish banking system, and creating the conditions whereby credit can flow in sufficient volumes to impact positively on the domestic economy

##s in economic activity that are preceded by problems in the banking sector tend to be longer in duration and, partly because of this, more severe than those caused by other factors. this is proving to be the case both here and abroad. since last september, deteriorating financial market conditions and intense strains on the financial sector led to sharp declines in economic sentiment internationally. trade and financial channels, meanwhile, transmitted the resulting weakness in demand across the globe. as a result, we have experienced one of the steepest and most synchronised global downturns for many decades, with economic activity contracting sharply in both the final quarter of 2008 and the first quarter of 2009. following a contraction of around 1½ per cent this year, the imf now expects global growth of 2½ per cent in 2010, somewhat higher than their previous projection of just under 2 per cent. nevertheless, by historical standards this will be a modest performance and, given the nature and scale of the crisis we have experienced, the recovery is likely to be gradual, extended and uneven across regions. the imf, meanwhile, see the risks to their growth outlook as still being tilted on the downside. the fact that some recovery may be in prospect over the next year or so primarily reflects the unprecedented response of policy - makers to the crisis. there has been an improvement in investor sentiment over the last number of months, with equity markets recovering somewhat, sovereign and financial credit default swap ( cds ) spreads narrowing and the unsecured money market showing tentative signs of improvement. however, financial markets remain quite fragile reflecting caution over the prospects of an early economic recovery. turning to the euro area, the eurosystem has responded to the crisis in several very significant ways. the governing council of the ecb has cut the main refinancing rate by a cumulative 325 basis points since last october bringing it to its lowest level on record at 1 per cent. this has had a very significant effect in lowering borrowing costs for households and firms across the region, including here in ireland. a range of innovative non - conventional policy measures have also been adopted, particularly in terms of liquidity provision. under the eurosystem ’ s revised operational framework including the full allotment policy, banks can access unlimited liquidity against suitable collateral at a fixed rate for up to 12 months. in addition, this month the eurosystem has started a programme that will see it purchase up to €60 billion of covered bonds issued by banks in the euro area