- denominated government bond markets as well. it is true that the integration of these markets had already been progressing in the run - up to monetary union, in particular from the mid - 1990s. for ten - year government bonds, the maximum yield spread between euro area countries ( except for greece ) has decreased from more than 250 basis points in 1995 to between 20 and 30 basis points after 1999. the remaining differences in long - term bond yields within the euro area can be mainly attributed to varying levels of market liquidity, to the availability of derivatives markets and to the credit risk of the respective issuer. in the corporate bond market, integration has accelerated as well, which has been reflected in reduced interest rate differentials within europe and in the growing percentage of foreign market participants. the indicators for the euro area equity market suggest that the degree of integration is rising, although room for further integration remains. as in the case of the secured money market, national legal provisions and fragmented securities settlement systems prevent the integration process in the stock and bond markets from deepening more fully. as regards banking markets in the euro area, the ecb integration indicators show that retail banking is generally far less integrated than wholesale banking and banks ’ capital market - related activities. cross - border inter - bank loans and cross - border holdings of securities have, in relative terms, experienced substantial growth. cross - border loans of euro area monetary financial institutions ( mfi ) to other euro area countries have increased from 15 % at the end of 1997 to 23 % in the middle of 2005. at the end of 1997, 15 % of securities held by euro area mfis were issued by non - mfis of another euro area country. this share has now reached almost 40 %. in contrast, the level of banks ’ cross - border retail lending activity within the euro area increased only slightly from a mere 2 % at the end of 1997 to around 3. 5 % today. the main reasons for the lesser integration in retail banking are the local marketing and distribution channels used in retail banking, customer relations that are still excellent in these markets and the better reputation of long - established institutions. another indicator for the level of integration of financial markets is the share of cross - border mergers and acquisitions ( m & a ) in total m & a transactions. this share is still comparatively modest and increasing only slightly. of the almost eur 500 billion worth of intra - eu mergers and acquisitions in the financial sector between 1999 and 2004 only about 20

globalization would reduce country risks by the growing opportunities of international risk sharing. the core idea of risk sharing is that individual country risks should be negatively correlated, so if the home country is affected by a negative shock, some foreign countries face a positive shock at the same time, and the returns from those countries would protect internationally diversified investors from domestic income losses. but the increased financial globalization not only made it easier for investors to invest in different countries, it also made it easier for financial crises to spread across borders. if international investors have to recover from a crisis in country a, they might start selling assets from country b, which was until then in no way affected by any sign of crisis. this kind of crisis transmission, sometimes also referred to as contagion, has so far mostly affected emerging markets ; now for the first time we witness this phenomenon on a global scale. as a consequence of the crisis, the global risk perception has shifted towards a more prudent assessment, and like so often in financial markets, the market has tended to overshoot, going from risk ignorance to a very high degree of risk aversion. such overshooting is currently taking place with regard to the spreads on government bonds in europe. whereas the interest on german 10 - year government bonds has been decreasing, several european countries now face higher interest rates, which can partially be explained by the soaring demand for liquidity, which is of course highest for german papers. the rather unusual increase of the interest spread of austrian sovereign debt versus germany has in addition been associated with the exposure of austrian banks in central and eastern europe. widely quoted statement by chuck prince, then ceo of citigroup, in a ft interview july 9, 2007 “ when the music stops, in terms of liquidity, things will be complicated. but as long as the music is playing, you ’ ve got to get up and dance. we ’ re still dancing. “ in this respect i want to clarify again that central and eastern europe ’ s economic potential is still intact, and that growth rates in that region will exceed those in western europe and the u. s. for the years to come, so these investments are still to be viewed as assets rather than liabilities. the euro as a shield in stormy times referring to a particularly negative episode in austrian and in world financial history, paul krugman correctly stated : “ smaller countries – like austria in 1931 – may once have been at the mercy of financial tides, unable to control their