In the euro area, the cumulated output loss from the second quarter of 2008 (when growth turned negative)  1  The total potential writedowns on the assets of global financial institutions (including banks pension funds, insurance companies and hedge funds) over the period 2007-2010 have been estimated at USD 4.1 trillion, of which about two thirds (USD 2.8 trillion) are expected to be borne by banks (see International Monetary Fund (2009)). These estimates, which include future potential writedowns until the end of 2010, are based on a number of projections of future economic activity and assumptions about asset market developments, and estimates of the likely impairment charges on loans. They are, therefore, subject to a substantial margin of error. 2  Figures based on S&P European 350 Index. It should be noted, however, that this index has recovered significantly since March 2009; market capitalisation rose from € trillion on 9 March to € trillion by 26 May 2009. BIS Review 65/2009  1  until the first quarter of this year, amounts to 5% of GDP, which is equivalent to about EUR 400 billion. 3 In order to mitigate the effects of the crisis on the financial sector and the real economy, governments and central banks have taken strong and decisive action. Indeed, in many cases they have implemented measures that are extraordinary in size and scope.
Since summer 2012, Target balances have shrunk by about a third. Spreads on long-term sovereign bonds vis-à-vis Germany have fallen by around 350 to 450 basis points for Spain, Italy and Ireland, and by more than 600 basis points for Portugal. Spreads in corporate debt markets have fallen by more than 150 basis points for some important market segments, and thus have made it easier for firms to raise funds in the market. What challenges are yet to be tackled? Despite these achievements, several challenges remain. Let me focus on three challenges for the ECB. One of them relates to a prolonged period of low inflation. Since the review of the ECB’s monetary policy strategy, which took place in 2003 under the auspices of Otmar Issing, the ECB has aimed at inflation rates below, but close to, 2% over the medium term. To be sure, current HICP inflation, which stood at 0.8% in January, can clearly not be considered close to 2%. Is this a reason for concern? With the average euro area inflation rate standing at 0.8%, we are clearly not in deflation, which is defined as a self-reinforcing fall in prices that is broad-based across items and across countries. Moreover, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%.