however, the study points to some possible overvaluation emerging towards the end of this period. i referred to this possibility at the time of our annual report in july. consequently the latest information on price developments is to be welcomed. we would be concerned if this trend is not confirmed in the months ahead and if prices were to reaccelerate once again. i should stress, however, that even if there is some overvaluation, this should not necessarily mean that house prices would fall ; the most likely way that the overvaluation would be corrected is via a period of low and stable house price inflation while the economy continues to grow. bearing this in mind, a soft landing for house prices is the most likely outcome. secondly, the strong increases in house prices, along with increasing interest rates, is contributing to a deterioration in affordability in the residential market. this is of concern for two reasons. first, a deterioration in affordability could increase the risk of an abrupt correction in house prices, should the risks i referred to earlier materialise. second, it may create an environment where there is pressure for some liberalisation of lending standards. private - sector indebtedness at present, total private sector debt has reached €300bn, equivalent to approximately 205 per cent of gnp ( 174 per cent of gdp ) ; this is very high both absolutely and in comparative terms and will be higher by the end of the year. historical experience from a number of countries suggests that high indebtedness may increase the vulnerability of the economy to shocks. the rate of debt accumulation has remained strong and virtually all categories of bank debt are increasing at rapid rates. these developments are inextricably linked to developments in the property market. if the signs of easing in house price increases were to be confirmed and to continue into 2007, along with confirmation of the apparent leveling off in housing output, the rate of increase in credit growth should reduce. it would be necessary to see a sizeable reduction in the current very high level of housing output before the increase in the rate of indebtedness returns to more sustainable levels. furthermore, conditions in the labour market are critical to borrowers ’ continuing ability to service these debts. it is noteworthy therefore that labour market conditions have been very favourable over the last number of years, with the economy operating at effectively full - employment, and the prospects for the immediate future seem favourable. ireland ’ s private - sector debt to gnp ratio is already high

patrick honohan : sovereign risk – a world without risk - free assets panel comments by mr patrick honohan, governor of the central bank of ireland, at the bis conference on “ sovereign risk – a world without risk - free assets ”, basel, 8 january 2013. * * * what ’ s new about sovereign risk since the crisis began? conceptually, not so much, i would suggest – and nothing that cannot be fully explained within standard models of finance. but in practice, and in particular in the euro area, two linked elements that were always potentially present or implicit have leapt into prominence in a way and to an extent that was not foreseen. the first is that markets have begun to price default risk in a sovereign ’ s home - currency ; the second is the contamination of the functioning and economic effectiveness of banks by the weak credit rating of their sovereigns ( as well as vice versa ). i have to admit to the possibility that my remarks may be subject to some professional deformation here, in that my perspective on these matters is likely coloured by my pre - occupation with the situation in ireland. ireland has certainly displayed these two elements in a dramatic way, but they are evidently present in half a dozen other euro area countries also and to an extent which has had implications for the functioning of the eurosystem as a whole, and therefore on the global financial system. let me take these two points in turn. first the pricing - in of sovereign default risk in “ home currency ”. why did the default premium suddenly emerge? evidently, even though everyone understood the rules, no such pricing - in occurred for the first decade of the eurosystem ( figure 1 ). risk appetite was high for much of that period, but the market ’ s perception of sovereign risk must also have remained low. ( perhaps, despite treaty prohibitions, market participants assumed that any sovereign that got into trouble would be bailed - out ). indeed, sovereign spreads in the euro area were almost totally insensitive to credit ratings before the crisis ( figure 2 ). one often - heard interpretation of what happened during that decade is that the complacent market environment relaxed the budget constraint on euro - area sovereigns and led them to borrow recklessly. actually this story doesn ’ t fit the facts very well. after all, although sovereign debt ratios in most of the eurosystem did not fall as much as they could and should have on the good years, at least they did