And if there is any correlation between credit risk perceptions acrossgovernment borrowers, this process in one country can create contagion to others. Indeed, while eight euro area governments entered the crisis with AAA-rated sovereign issues, today only three have that status.14 Market discipline has destroyed safe assets more than it has created them.
I would also suggest that even if we achieved slightly lower interest rates, the effect on economic activity is likely to be small. Interest rates have systematically been brought down to unprecedented low levels and kept there for an extended period. The economy’s response has been positive but modest.