corporations, the low level of interest rates has helped to improve their balance sheets after a period of excessive investment and borrowing. this restructuring, or repair of balance sheets, has been very important in the euro area. more recently, however, low interest rates have fuelled an increase in borrowing and a tendency of firms to borrow short term, rather than long term. but despite this development over the past year, the ratio of short - term to long - term obligations of euro area firms is not high. the flattening of the yield curve has exerted some pressure on bank profits. however, the profitability of euro area banks has evolved in a very satisfactory manner as a result of the positive influence of other factors, increased lending, especially mortgage lending, higher non - interest income and as a consequence of cost cutting and a reduction in the flow of provisions. low interest rates may encourage banks to increase their holdings of more risky assets and this could have implications if credit conditions change when interest rates increase. is that the same as saying that there are no risks to economic growth of rising interest rates? it is not the same thing, but under the present circumstances the consequences would be similar. with respect to the specific adjustment in the monetary policy stance of the ecb that took place earlier this month, i would not expect this to have a significant adverse effect, if any, on the ongoing economic recovery in the euro area. will the general global monetary policy tightening have an impact on euro area growth? in principle, a tightening of monetary policy – global and domestic - would be expected to contain aggregate demand growth. the extent, however, of this effect depends on the initial conditions and on the influence of a variety of other factors. in the us, despite the substantial increase in interest rates since the middle of 2004 which followed a fairly long period of low interest rates, economic growth has remained robust because of the cumulative impact of the previous monetary accommodation and of other factors that have at least partly counterbalanced the effects of higher interest rates. an important channel through which monetary policy influences the economy is through its effects on long - term interest rates. if long - term interest rates remain at a low level – as a result of favourable inflation expectations influenced by a credible monetary policy oriented towards price stability and as a consequence of the impact of other factors – then the effect on economic activity of a rise in short - term interest rates is going to be more muted. moreover, the expected strength of euro area economic growth in

long - term debt sustainability in various parts of the world. these developments have further threatened financial stability as financial institutions hold a significant share of troubled countries ’ government bonds. here, the onus is clearly on governments to engage in the necessary fiscal corrections. however, this does not only mean exiting from the fiscal stimulus and support measures taken in response to the crisis. even with these measures reversed, fiscal policy still faces at least three important challenges. first, excluding crisis - related stimulus measures, most advanced economies are still left with historically high deficit - to - gdp ratios, which, in the context of today, are largely structural in nature. to put it another way, given the lower actual and potential post - crisis output and correspondingly lower post - crisis tax revenues, pre - crisis spending levels are no longer affordable. secondly, government debt - to - gdp ratios are now much higher than before the crisis, and the guarantees provided to the financial sector have added to the potential liabilities. thirdly, over the next two to three decades, governments face rising costs related to ageing populations. due to the combination of these factors, questions are – unsurprisingly – being asked about the ability of some governments to bring their public finances onto a sustainable path over the medium term. in this regard, let me point out that the state of public finances in the euro area differs significantly across countries. according to the imf the debt - to - gdp ratio ranges from 6 percent in estonia to 152 percent in greece in 2011, while the aggregate debt - to - gdp ratio for the euro area stands at 87 percent. but let me also emphasise that restoring sound public finances is not only a challenge for the euro area. as i mentioned before, government deficits and debt levels in many advanced economies outside the euro area have also risen to historically high levels, at least in a time of peace. for the largest industrialised countries such as the us, uk and japan, according to the imf the debt - to - gdp ratio in 2011 ranges from 83 percent in the uk, to 100 percent in the us and 229 percent in japan. the state of public finances clearly matters for central banks. at least from a theoretical point of view, one of the reasons is that monetary policy could in principle be used – or abused – to alleviate a government ’ s budgetary woes. the regime that has prevailed in advanced economies over the last three decades has been a regime of monetary dominance, under which