judge by looking at the section which is visible above the surface. this is in my view a useful metaphor, because as the crisis gradually unfolded, a chain of unexpected problems came to the surface and vulnerabilities that were previously underestimated became apparent. let us consider first the tip of the iceberg, namely the liquidity crisis. tensions in money markets erupted in august 2007 when the us mortgage market, which was at the epicentre of a complex network of financial derivative products held globally, started to un - ravel. liquidity in interbank markets worldwide dried up as market participants became paralysed by uncertainty. the key problem was that counterparty risk – which had hitherto remained bis central bankers ’ speeches limited – suddenly increased in great proportions because the distribution of risk exposures to us subprime mortgage markets was markedly opaque. this led some market segments to partially freeze and others to close completely. this is where the second layer of the iceberg comes onto the stage. the collapse of lehman brothers in the autumn of 2008 triggered an exceptionally abrupt re - pricing of risks globally. it led to a very significant intensification of the financial crisis ; to a temporary freeze in trade financing and a global trade decline ; to a curtailment of credit and domestic demand ; and, ultimately, to a severe decline in global demand and output. the main channels through which the crisis was transmitted internationally are now relatively well understood, although the extent and strength of the interconnectedness was quite surprising in real time. activity corrected most in countries where credit was booming prior to the crisis, with large current account deficits, high external debt and highly leveraged financial sectors, in particular. 1 in the euro area, a channel of particular importance was the fact that some banks had tapped us wholesale funding markets in large amounts to finance their activities. 2 some of these banks were in addition as heavily involved as us banks in the production of allegedly riskfree securities, such as asset - backed commercial paper, that aimed to meet the needs of us money markets funds. 3 they were severely hit when these markets froze. moreover, although the euro area ’ s current account was broadly balanced, it still had significant gross external assets and liabilities vis - a - vis the us, which acted as a powerful conduit of the crisis. challenges became more intricate still when the third layer of the iceberg – the sovereign debt crisis – surfaced towards the end of 2009. risk re - pricing intensified

, spreading from banks to sovereigns and back to banks in an adverse feedback loop, and interacted with existing – but previously hidden – vulnerabilities in several euro area countries. this feedback loop included three separate ingredients. first, the solvency of some banks was strained by significant exposures to domestic sovereign debt and write - offs or declines in the market value of government bonds that eroded their capital. second, declines in the market value of government bonds led to liquidity strains, insofar as these bonds are widely used as collateral in interbank markets. and third, in some instances, governments had to step in to recapitalise vulnerable domestic banks, thereby increasing their own debt in turn. this “ tale of two debt overhangs ”, as some have called this twin crisis of banks and sovereigns, had uneven effects across euro area countries. 4 some countries were markedly more affected than others, which contributed to increased financial fragmentation in the euro area. this also laid bare further fragilities that had been accumulated in the past, including the fact that some euro area countries had neglected structural reforms and as a result faced competitiveness losses and the built - up of external deficits. while these fragilities had not gone completely unnoticed, and had been pointed out early on by the ecb, they had not received the attention they deserved until the crisis struck. this bears similarities with the asian financial crisis, which is well remembered in this part of the world. some experts saw it coming and warned at an early stage against the causes that led to it, such as short - term see e. g. berkmen, p., g. gelos, r. rennhack and j. walsh ( 2009 ), “ the global financial crisis : explaining cross - country differences in the output impact ”, imf working paper, no. 280 ; berglof, e., y. korniyenko, a. plekhanov and j. zettelmeyer ( 2009 ), “ understanding the crisis in emerging europe ”, ebrd working paper, no. 108 ; lane, p. r. and g. m. milesi - ferretti ( 2010 ), “ the cross - country incidence of the global crisis ”, cepr discussion paper, no. 7954. see h. s. shin ( 2012 ), “ global banking glut and loan risk premium ”, mimeo, princeton. see v.