As a consequence, the entire economy’s lending conditions deteriorated significantly in the countries under stress. The implications of the crisis were not confined to countries under stress but also visible in core euro area countries. With fears of a euro area break up growing, core euro area economies became the destination of safe haven flows.
Liquidity was suddenly drying up in stressed countries, threatening to lead to a destructive downward spiral of abrupt deleveraging, fire sales and ultimately deflation. By contrast, there was a risk that abundant liquidity in core countries would unduly drive down financing conditions and fuel asset price bubbles. In fact, as market interest rates were surging in countries under stress, they declined in core countries.