subprime mortgage - backed securities and related credit derivatives rampant in the market at that time were assigned the highest aaa rating by the major cras. and, according to the general estimates of these agencies, the probability of default within a year for debt instruments with such a rating was near zero ( 0. 000 % ) ; while the probability of default within five years was a mere 0. 09 %. now, we all know that these cras were dead wrong. many people, including professional and institutional investors, had a misplaced trust in these agencies and underestimated the risks involved. they learnt a painful lesson in 2008 / 09. 3. of course, cras cannot be blamed for every market failure. let ’ s turn to the european sovereign debt crisis, the epicenter of which has been greece. when greece joined the eurozone in 2001, its sovereign debt rating was a mere a -. the market yield of its sovereign debts denominated in the greek drachma in 1995 was about 17 %. in 2003 after its accession to the eurozone, greece had its credit rating upgraded slightly to a +, still not a very high rating. yet, in the ensuing nine years or so, market players were particularly exuberant on the country ’ s prospect and piled into greek sovereign bonds without really taking into account its economic fundamentals, fiscal positions and sovereign rating. at one stage in 2005, the greek sovereign bonds were traded at a spread of as low as eight basis points above the triple - a rated german bunds. looking back, this was essentially blind chasing of high risk investments by tens of thousands of market players and investors impervious to objective economic analysis and credit ratings. in the end, they suffered great losses. furthermore, the capital market failed to price in a reasonable risk premium for the greek sovereign debts, suppressing greece ’ s borrowing costs for a prolonged period of time. bis central bankers ’ speeches this effectively encouraged a borrowing binge by greece that ended up in the plight today. if the market had asked for a higher risk premium, the increase in borrowing costs might have sent a sobering message to the greek government and its people to avoid overstretching themselves and therefore might have avoided a near breakdown of their economic and financial systems. 4. hong kong also experienced market failure in 1998, a year after the asian financial crisis had severely hit a number of regional economies. although hong kong managed to stand on its feet after the crisis, market

, hong kong could fall prey to global predators, resulting in market failures. if the markets were allowed to plunge in free fall, the entire financial system might face a total meltdown. it was at such a critical moment that the hong kong sar government was left with no other option than to take unprecedented action. today, with 17 years behind us, hong kong remains a free and open market and an international financial centre as before, and any lingering doubt has vanished. after all, “ actions speak louder than words ”. the operation was an extraordinary strategy to deal with extraordinary circumstances. and, we delivered on our pledge to exit promptly and effectively. over the years, we have drawn on this experience to further refine the linked exchange rate system, enhance risk management and strengthen the resilience of our financial system. 8. recently, our country has also been faced with the need of taking some extraordinary steps to stabilise the stock markets and guard against systemic risk. any further measures by the central government and their effectiveness will be closely watched. in my view, if the central government can devise a robust exit mechanism as soon as market stability returns and continue to push through financial reforms, including liberalising the capital account and internationalising the renminbi – in other words demonstrating its staunch commitment to reform and liberalisation – it will be able to regain and reinforce confidence within the country and around the world in the market development and investment environment in china. 9. thank you. bis central bankers ’ speeches