also embarked on outright purchases of securities, though on a relatively limited scale, in order to support the broader functioning of euro area financial markets. the covered bond purchase programme was initiated in july 2009. this programme was part of the “ enhanced credit support ” measures and its objective was to support a financial market segment that is particularly important for the longer - term funding of banks and the financing of the real economy in the euro area. the spill - over effects connected with the intensification of the financial crisis in september 2008 had led to a virtual shut down of the covered bond market, notwithstanding the high credit quality of this type of asset. in response, the eurosystem purchased eur 60bn of covered bonds between july 2009 and june 2010. empirical research conducted by ecb staff suggests that the cbpp has been successful in achieving its goals ( beirne et al., 2011 ). not least due to strong and timely action by central banks and governments, worldwide signs of stabilisation in financial markets emerged, with spreads returning to pre - lehman levels and positive output growth resuming in the second half of 2009. in this respect, the ecb ’ s non - standard measures played a non - negligible role in supporting the euro area economy. ii. 3 from the financial to the sovereign debt crisis chart 1 also shows that sovereign credit spreads ( relative to the german bund ) started to widen already in the early stages of the crisis as the market reassessed risk across the board. but sizable repercussions on the sovereign bond market are noticeable only after the collapse of lehman brothers, when the spread on irish and greek long - term government bonds soared above 250 basis points. this reflected the fact that, during the initial stages of the crisis, government guarantees for the financial sector and, more generally, the policy response to the crisis implied a transfer of risk from the private sector to the government sector. however, as deficits surged and the greek government revealed a much larger deficit than previously thought, the attention focused more on the state of public finance. from then on, and in particular after the downgrading of greek bonds by all the major rating agencies, the financial crisis that originated in the us turned into a sovereign debt crisis with a european epicentre. this escalation of events brought the crisis to a new dangerous level. while in the early phases concerns focused around the risk of a protracted recession the new phase raised concerns regarding the ability of some euro area

generates margin calls or increased haircuts, will lead to larger asset - price falls the more illiquid are these assets. for these reasons, financial intermediaries play a key role in this environment. on the one hand they increase stability by providing liquidity - transformation bis central bankers ’ speeches services. on the other hand, when their net - worth deteriorates, their ability to provide liquidity ( inside money ) is impaired increasing the value of outside ( central - bank ) money. as the money multiplier shrinks, “ fisherian deflation ” sets in worsening the debt burden of borrowers and, hence, further amplifying the contraction. regrettably, the diversification delusion discussed in boz and mendoza and the understatement of the liquidity - risk channel in brunnermeier et al. affected investors as well as policymakers and regulators. indeed this same literature tells us that there can be ample scope for welfare improvements through economic policy. the fundamental reason for this public role is that private agents, typically, are not large enough players to internalize the general equilibrium – or even market specific – consequences of their portfolio decisions ( as in the case of fire sales ). these results warrant ample liquidity injections by central banks and underpin the current wave of regulatory reforms undertaken in the european union as well as in other major economies. among these reforms, it is important to mention in particular the new basel accord ( basel iii ) on banks ’ capital adequacy which is consistent with the idea of brunnermeier et al. that critical reductions in banks ’ capital can generate dangerous liquidity shortages. equally important is the establishment of the european systemic risk board ( esrb ) with macro - prudential oversight responsibilities over the financial system in the european union, which directly relates to the limited ability of financial markets to internalize systemic risk. another important lesson that has been learned, admittedly the hard way, is that it is very difficult, if at all possible, for the market to correctly price sovereign risk. charts 1 and 3 offer a clear example of what i mean. in particular consider two of the most troubled economies, i. e. greece and ireland. the evolution of their public finances in the recent history leading up to the crisis is dramatically different ( as chart 3 shows ), in large part reflecting the deep differences in their growth experiences. up to the start of the crisis ireland experienced a rapid fall