There was considerable uncertainty over who was actually holding the bad loans and the problems quickly spread around the world. The uncertainty increased over the summer when credit rating agencies downgraded many of these products. During the third quarter of last year several investment banks reported large write-downs as a result of the bad loans, and in connection with this uncertainty once again increased. In recent months the situation in the financial markets has been characterised by considerable uncertainty over future risks, large write-downs and funding problems for financial institutions. The instability has led to a fear among the banks that they may face liquidity problems, that is, experience difficulty taking new loans when the old ones fall due for payment. It has also lead to fears of an increased credit risk when lending to other banks. This means that the banks have preferred more liquid and risk-free investments, while more banks have experienced difficulties in financing themselves in the interbank market. As a result, government rates have been pushed down, while interbank rates have risen. We have seen this development in many large economies. The interbank markets have been much more volatile than normal. In many countries they have at times functioned poorly in the sense that there has been reluctance to lend money to some banks. In some countries, such as the United Kingdom and the euro area, the considerable uncertainty has led banks to prefer to invest safely in the central bank instead of on the interbank market.
Greece, Ireland and Portugal are the three countries that have benefited from EU and IMF rescue packages. I will return to this in greater detail in a minute. The financing conditions of a number of other euro area countries have been extremely tight for the past few months, but they have not required bail-outs. This is particularly the case of Spain and Italy. Here too, certain economic or political weaknesses along with deteriorated public finances are stoking fears in financial markets, which – I should say in passing – have the unfortunate habit of lumping all players together and always expecting the worst. I would like to stress one point: the current crisis is not a crisis of the euro but a sovereign debt crisis. Moreover, we can see that all the turmoil that has been affecting the economy for the past few years is ultimately due to indebtedness: first, US household indebtedness and then sovereign indebtedness. Nevertheless, since end-2009, the crisis has revealed major shortcomings in the implementation of fiscal discipline and, more generally, in the economic governance of the euro area. The founders of the single currency had put in place the Stability and Growth Pact because they knew that a monetary union could not work without a common fiscal discipline. Its principles were sound, aiming to achieve a long-term balanced budget. But its implementation was greatly lacking.