2  BIS Review 103/2009  One important element of the ECB’s actions has been the non-standard measures I have described as “enhanced credit support”. 1 This support collectively defines the special and primarily bank-based measures to enhance the flow of credit over and above what could be achieved through policy interest rate reductions alone, and avoid a systemic liquidity threat. As you know, the ECB’s enhanced credit support comprises five elements: •  the full allotment of banks’ demands for central bank liquidity at fixed rates;  •  the further expansion of the list of assets accepted as collateral in our operations;  •  the lengthening of the maturity of our operations that now go up to one year;  •  the provision of liquidity in foreign currencies, notably US dollars; and  •  finally, direct purchases of covered bank bonds in order to revive this market segment, which is important in Europe. Let me briefly recall the rationale underlying these five specific measures. The first motivation for introducing enhanced credit support was to address the seizing up of the money market. If left unaddressed, this seizing up would have rendered the refinancing of many bank assets impossible, risking a massive and disorderly deleveraging by credit institutions. This, in turn, would have seriously hampered the monetary policy transmission mechanism and ultimately curtailed the expansion of credit to firms and households in the euro area. The core of the measures that we introduced in October was the “fixed-rate fullallotment” tender procedure.
At the end of my speech I expressed concerns that the correction of financial imbalances, and the associated re-pricing of risk, might not have run its full course. As we now know, this was indeed the case. Only ten days later, the re-pricing in markets took a quantum leap. In mid-September the turbulence turned into a full-blown crisis. The chart of money market spreads tells this tale clearly. BIS Review 103/2009  1  As you can see, credit spreads soared. Financial market activity fell dramatically, volatility spiked and the global financial system came close to seizing up. Central banks stepped into the breach, addressing this unprecedented market failure. The ECB was in the vanguard of actions to contain these intensified tensions, taking a number of standard and non-standard measures. The measures by the leading central banks eventually paid off. As you see in the chart, money market spreads – a symptom of the market failures that I mentioned – retreated from their peaks. They are now back at levels comparable to those before the intensification of the crisis last year. But they still remain elevated in a longer time perspective. The crisis triggered a freefall in economic activity. The chart shows that within a few months only, from January to July 2009, the projections for 2009 shifted massively to the left, in highly negative territory. After they centred around -1.5% in January 2009 and -3.2% in April 2009, they dropped to -4.5% in July, entirely outside the distribution range still a few months earlier.