For example, the change to a full-allotment system for all applications for liquid funds submitted by institutions; the extension of the assets eligible as collateral for these funds, precisely to prevent potential bottlenecks in this area that might ultimately make the full-allotment arrangement inoperative; and an extension of the maximum terms over which liquidity is granted, which in the recent December meeting was set at three years, a horizon that clearly goes beyond what, in normal times, should act as a reference for the pursuit of monetary policy. The Securities Market Programme for the purchase of assets on secondary markets is also playing a significant role in restoring the normal functioning of the sovereign debt markets. That said, the ultimate causes of the tensions in place are due to underlying problems over whose resolution the monetary authority can exert little or no influence. These policies respond to the need to ensure the correct functioning of the monetary policy transmission mechanism, without which the Eurosystem could not meet its objective of maintaining price stability in the euro area. But it should nonetheless be acknowledged that such conduct gives those responsible for the other areas of economic policy valuable time in which to pursue the design and implementation of the measures needed in those areas.
Although it is not easy to reconcile the recent sharp falls in confidence in the US and the relative stability of stock market prices, it would appear that investors generally have taken comfort from the Federal Reserve's ability and willingness to react to the latest data, and take appropriate action. The second cloud on the horizon is the risk to emerging market economies posed by the US slowdown and the unwinding of imbalances in the industrialised world. In some emerging markets, especially those in East Asia exporting high technology products to the United States, the immediate outlook is for weaker economic growth. But for other countries, especially in Latin America, the fall in US interest rates and in the dollar against the euro will mitigate the direct loss of export demand. But the major concern is to avoid another financial crisis, of which there have been too many in the past five years. From Mexico in 1995, through the Asian crisis in 1997 and Brazil in 1999, and, more recently in Argentina and Turkey, sudden reversals of short-term capital flows have created financial crises. In many cases, these crises have proved devastating to the citizens of the countries affected. 2  BIS Review 16/2001  The existence of deep and liquid international capital markets offers opportunities for greater risk diversification by both borrowers and lenders. But it also increases the risk of contagion from one country to another affected by an outflow of short-term debt finance.