##eseen. so i will now talk about the sovereign debt problem in europe. european sovereign debt problem and accumulation of financial and economic imbalance the origin of the sovereign debt problem was greece ’ s massive fiscal deficits that surfaced toward the end of 2009. in the spring of 2010, greece faced difficulty in raising funds in the market and was driven into a corner which was said to be a greek crisis. as a result, greece received financial support by euro area countries and the international monetary fund. the greek government subsequently announced various fiscal structural reforms including a bis central bankers ’ speeches reduction in public servants ’ salaries and revisions in the tax system. however, amid negative economic growth, a fiscal deficit reduction was not achieved in a pace initially envisaged, and greece faced a second round of crisis toward this summer. in the meantime, a decline in market confidence in fiscal sustainability, which started from greece, has spilled over to peripheral countries including ireland and portugal, which was in a tough fiscal situation, as well as bigger economies such as spain and italy. the yields of government bonds in those countries have risen substantially and market prices have declined significantly. european financial institutions, mainly those which held a large amount of such government bonds, have faced deterioration in their balance sheets and difficulty in raising funds in the markets. they have started to strive to reduce the size of balance sheets through measures including tightening their lending stance. as a result, firms ’ and households ’ sentiment has deteriorated and economic activity has been slowing. at present, in europe, a rapid adverse feedback loop seen during the lehman shock has not been generated, but the adverse feedback loop of the fiscal situation, the financial system, and economic activity seems to have started to act. on the back of the sovereign debt problem in europe, there are factors that are essentially common to the lehman shock. namely, against a backdrop of accommodative financial conditions in the mid - 2000s, a rise in asset prices, and optimistic growth expectations, financial and economic imbalances have been accumulated. in the united states, on the back of “ technological innovation in finance ” as seen in an expansion of securitized products, financial institutions ’ and investors ’ risk awareness concerning financial products including subprime loans became lenient. that, together with accommodative financial conditions and a rise in housing prices, has led to a significant increase in home loans and an accumulation of imbalances, mainly in the household sector, and consequently induced the lehman shock

since the asian financial crisis, many countries in the region have made wide - ranging efforts, including a reduction in the non - performing loans held by banks, in order to enhance their resilience against capital flow dynamics. however, the presence of domestic bond markets in the asian financial system is still limited, compared with that of banking sectors. in order to further strengthen financial stability in asia, it is important to diversify funding sources for firms by developing domestic bond markets. 5 recent empirical studies6 point out that domestic bond markets in east asia provided an alternative source of funding for firms in the region when the liquidity of international debt markets vanished during the global financial crisis from 2008 to 2009. east asia saw greater domestic bond issuance during the crisis, in contrast with lower international bond issuance and a reduction in the amount of syndicated loan origination ( chart 3 ). this result tells us how important it is to develop domestic bond markets to make the asian financial system more robust. enhancing the effectiveness of monetary policy lastly, i will touch on the effectiveness of monetary policy. for the conduct of monetary policy, central banks buy and sell financial instruments from capital markets, and they also receive financial instruments as collateral for the provision of liquidity. so, the degree of market functioning and liquidity concerning those financial instruments is a critical element that impacts the effectiveness of monetary policy. for example, see bank for international settlements ( 2016 ), " a spare tire for capital markets : fostering corporate bond markets in asia, " bis papers, no. 85, which focuses on the importance of domestic bond markets among capital markets in times of crisis. 6 abraham, f., j. j. cortina, and s. l. schmukler ( 2019 ), " the rise of domestic capital markets for corporate financing : lessons from east asia, " world bank group policy research working paper, no. 8844. in this regard, repos are financial instruments that are frequently used in the conduct of monetary policy, because repos carry a low credit risk and they are suitable for inventory and liquidity management by market makers. in asia, market participants have preferred to use fx swaps and uncollateralized funding because of their accessibility and operational convenience, and the role of repo markets has been relatively limited overall. however, the situation is now changing. the emeap market survey7 suggests ongoing efforts to enhance the functioning and liquidity of money markets such as repos. these efforts