where we fixed the price of liquidity and let the market decide over the quantity that is needed to support that price. • also, in the aftermath of lehman ’ s default we extended the term at which liquidity was lent to banks from three to six months to one year ( in june 2009 ) and we broadened collateral rules. by allowing banks to liquefy a larger share of their assets and by stabilising the liquidity horizon of those banks in liquidity deficit, which had lost access to the money market, we averted a major disruption in the first stages of the transmission mechanism. bis central bankers ’ speeches • in the face of the 2011 – 2012 escalation of the debt crisis ( when the confidence collapse reached two systemic countries ) we concentrated on banks ’ loss of access to the wholesale market to address a major roll - over risk. we conducted two threeyear operations ( ltros ) that helped banks in a wide part of the euro area to do funding substitution. a significant share of the increase in eurosystem credit to banks in spain and italy, for example, was used to reimburse bank securities that were coming due over the next 12 months and would not have been rolled - over by the market. without this relief banks would have had to shed assets on a large scale ( given high leverage ), with potentially systemic implications for the euro area economy as a whole. • finally, when a major tail risk emerged in the securities market in mid - 2012, as more and more weight was given in the pricing of market debt to the risk of a euro area break - up, we announced our decision to conduct outright monetary transactions in the market for sovereign securities, conditional on the issuer submitting to strict multilateral surveillance. in a very difficult environment the ecb succeeded in preserving its credibility, as witnessed by the anchoring of inflation expectations throughout the crisis. over the following 12 months or so, the cumulative effects of this action were able to eliminate fears of disaster events, remove tail - risk from the market and thereby reduce fragmentation. however, with growing evidence since the start of 2013, banks in large parts of the euro area started to respond to the funding challenges and the need to reinforce their capital structure by reducing their activities, in particular their loans to the real economy. the funding crisis had morphed into a trend which could lead to a widespread credit crunch. therefore, in may 2013 against the background of subdued monetary and loan dynamics and very weak economic

because of the feared negative impact on the economy. 2. as countries show hesitation in addressing their budgetary problems, access to financial markets tends to become more difficult. 3. when market access deteriorates, the budgetary measures required to restore confidence are much more drastic and painful. some observers, especially outside europe, have suggested that european democracies are not able to deal with such a vicious circle. they consider that the only way out of the dilemma is a default, or a partial default. some have – even recently – voiced openly this view, maybe with the intent to influence financial markets and increase the probability of such an event to occur ; an event from which they would presumably take profit. this view, however, does not take into consideration that in advanced economies a sovereign default is very damaging for the citizens of the country concerned, as it would drastically affect their wealth. increasing the primary surplus, either by cutting expenditure or by increasing – in certain cases by starting to pay – taxes, has in most cases less damaging effects on the economy and on citizens ’ well - being than a cut in the value of their financial assets. to sum up, consolidating public finances is painful economically and politically, but the alternative is worse. governments in europe are fully aware of this. let me move to the second issue, which concerns the strengthening of the institutional framework underlying the single currency. to understand the issue one should first consider what did not work as expected during the first ten years of the euro. two main things did not work. first, in some countries the behaviour of the private and public sector was not fully consistent with the long run requirements of a single currency area. divergences may occur in currency unions, or even within countries, as some regions may grow more than others and experience booms which then burst. in the euro area, the lack of a federal budget transforms country - specific shocks into public finance shocks and thus financial stability shocks. this is why a currency union like the euro area needs a system of discipline for both the public and the private sector, to be exercised at the level of the member states. the euro area had a system aimed at disciplining the public sector, i. e. the stability and growth pact ( sgp ), with rules and procedures aimed at avoiding excessive deficits. the pact worked in some cases, but not all. the main reason has been that the eurogroup, which comprises the finance ministers of the euro area and