Real gold prices have more than doubled since 2008, edging towards their previous high-water mark after the oil price shocks of the late 1970s (Chart 6). Safe-haven flows to the Swiss franc have boosted its value by over 30% against both the euro and the dollar since September 2008. The reach-for-return, familiar at times in the past, has flipped into a scramble-for-safety. Risky assets tell a similar tale. The compensation investors demand for risk – the so-called risk premium – in advanced economy equities and investment grade corporate bonds is above or in line with its long-term average value. Bank lending spreads, which embody a compensation for risk, are materially higher for all classes of borrower. And measures of equity market uncertainty, such as the VIX, are at levels not seen since early 2009 (Chart 7). Not for nothing has the VIX become known as the “fear index”. Some risky assets have fared better. Since their trough in late 2008, global high yield debt prices have risen by two-thirds, emerging markets equities have roughly doubled, while commodity prices have risen by even more. But even these assets have recently fallen from their peaks. Investors have concluded this is not a time for bravery. For much of this century, risk was cheap. Today it is expensive. Market participants’ willingness to put risk capital to work can be seen in measures of financial market liquidity. Those have also yo-yoed (Chart 8).
Clearly, it was not by chance that some countries found themselves in a more difficult situation than others. It was mainly those countries that had implemented inappropriate economic policies in the past. This is also why the first responsibility in this situation is for countries to make determined reforms and convince markets that they are credible. But many were already doing this, only for interest rates to rise even higher. There was an element of fear in markets’ assessments that governments, acting alone, could not remove. Markets were not prepared to wait for the positive effects of reforms to emerge. In our view, to restore the proper transmission of monetary policy, those unfounded fears about the future of the euro area had to be removed. And the only way to do so was to establish a fully credible backstop against disaster scenarios. 2  BIS central bankers’ speeches  We designed the OMTs exactly to fulfil this role and restore monetary policy transmission in two key ways. First, it provides for ex ante unlimited interventions in government bond markets, focusing on bonds with a remaining maturity of up to three years. A lot of comments have been made about this commitment. But we have to understand how markets work. Interventions are designed to send a clear signal to investors that their fears about the euro area are baseless. Second, as a pre-requisite for OMTs, countries must have negotiated with the other euro area governments a European Stability Mechanism (ESM) programme with strict and effective conditionality.