The fire sales in the government bond markets of the so-called periphery countries led to a vicious cycle of worsening fiscal balance, increasing tensions in the domestic banking system, and dampening of real economic activity.
With a view to arresting and hopefully reversing this destructive momentum, ECB has conducted two operations, once at the end of last year and another at the end of this February, supplying an unlimited amount of three-year funds. The subsequent return of relative calm to global financial markets demonstrates that central bank liquidity can play an important role.