global financial stability. the existence of one major reserve currency can make exchange rate fluctuations more abrupt ; at the same time it limits the scope for markets to discipline macroeconomic policies in advanced deficit economies bis central bankers ’ speeches ( especially the us ). thus far only limited realignment of exchange rates in emerging market economies with large surpluses took place. the pegging of exchange rates to the dollar affects the exchange rate of third countries away from fundamentals. in emerging market economies with flexible exchange rates and open capital accounts, large capital inflows have pushed up their exchange rates, in some cases into overvaluation territory ( for example, in latin america ). the insufficient adjustment of exchange rates and of macroeconomic imbalances may lead to disorderly policy reactions and encourage beggar - thy - neighbor policies. the way forward the priority for the international community is to avoid that current disequilibria degenerate in a disorderly adjustment. we need determined action in a number of fields. first and foremost, a rebalancing of global demand is key for a sustainable recovery. advanced economies need to tackle the debt problem : fiscal consolidation and reduction of leverage in the private sector, must be accompanied by structural reforms aimed at spurring potential growth. in large fast - growing emerging markets, especially in china, excessive saving should be curbed ; this implies a gradual shift away from a purely export - led model that must be supported by a correct set of policies, including introducing social safety nets in order to facilitate the reallocation of workers across sectors and reduce precautionary savings. more currency flexibility can support the rebalancing of demand. in large surplus emerging economy, most notably in china, allowing the currency to appreciate gradually by not reinvesting surplus funds into advanced economies ’ assets would also help to reduce inflationary pressures. second, a more sustainable pattern of global demand can be reached only by reinforcing international cooperation and multilateral surveillance. an important step in this direction was made at the 2009 pittsburgh summit, where the g20 pledged to work together to set the world economy on a path of strong and sustainable growth. the g20 “ framework for strong, sustainable, and balanced growth ” and the “ mutual assessment process ” ( map ), are crucial to identify common objectives and the required actions to reduce imbalances. it is indeed a demanding task as the seoul summit last year and the current process within the g20 this year have shown. third, even

relies on capital markets, market infrastructures are of paramount importance. the quality and reliability of both technical infrastructures – payment, clearing and settlement systems – and the organization of trading in public markets directly affect all players. • a more connected world improves risk diversification and makes markets more resilient. but when contagion is actually set off, an interlinked financial system heightens the risk that it may spread more widely. the very channels that in good times enhance resilience may also propagate, and possibly amplify, shocks. interdependence thus requires more international coordination of policies for liquidity provision, regulation and supervision of markets and intermediaries. this would help to impede opportunities for regulatory arbitrage and the situations of moral hazard. 4. challenges for authorities and regulators the recent financial turbulence has posed a number of stiff challenges to monetary authorities and financial regulators. so far, the response has followed a two - pronged strategy : central banks have provided liquidity in order to ensure an orderly functioning of money markets while a number of far - reaching initiatives have been launched in the international fora of cooperation to strengthen the financial system. 4. 1. short - term response to stabilise markets when financial and credit market turmoil produces systemic tensions in money markets, distinguishing between the aims of liquidity provision and the reasons that stand behind the setting of policy interest rates – easy under normal circumstances – becomes more difficult. on the one hand, the actions needed to ensure orderly functioning of the money market may blur monetary policy signals. on the other, decisions on interest rates could be interpreted as revealing major information unknown to the market and hinder its normal functioning. in particular : • recent events have demonstrated that modern central banks, and the ecb in particular, are well - equipped to deal with these problems, at least as far as shortterm money market rates are concerned. since august, the major central banks have provided ample liquidity to the interbank system, keeping short - term rates under control. while very short - term rate volatility has increased significantly since, in the euro area the differential between the overnight and the official rate has generally remained very low, in line with pre - crisis levels. • in the united states, the fed has lowered its target rate twice, for a total of three quarters of a point. in the euro area, meanwhile, the policy rate has been kept unchanged. in neither case has day - to -