In particular, more effort is required to ensure that domestic inputs are priced competitively, and hence the need for continued wage moderation; to raise productivity levels; and to ensure faster progress towards key Lisbon Agenda objectives such as educational attainment and innovation. Measures aimed at strengthening the economy’s physical infrastructure and the quality of its human capital, a more efficient delivery of support services by the public and private sectors, and enhanced competition both in product and resource markets are crucial in this regard. This is the only way to increase the economy’s capacity to  2  BIS Review 77/2007  respond flexibly and competitively to new challenges and opportunities, and thus derive the full benefits of EMU. A high level of economic convergence and flexibility, however, are not sufficient for a successful transition to the euro. This also requires both careful logistical planning and public acceptance of the single currency. As for the former, the necessary structures have been in place for two years and they seem to be working well. At the apex stands the National Euro Changeover Committee (NECC), which has drawn up a national Master Plan. The Central Bank of Malta is represented on the Steering Committee which oversees the work of the NECC, it participates in the financial sector committee of the NECC and it is also present on a task force responsible for co-ordinating national training activities related to the euro.
Tail risks with counterparty risk correlation The first category of contracts falls under the broad headline of “wrong-way” risk in tail events, and is purely statistical in nature. The particular issue is focussed on contracts that can be perceived of as providing insurance yet, in a stress scenario, when the contract is sufficiently in the money to be worth calling, there is a significant conditional probability that the insurance provider is no longer in business to pay out. In what follows, we look how such problems arise using practical examples and consider what lessons should be drawn. 1  For example, the Squam Lake Working Group on Financial Regulation, July 2009, “Credit Default Swaps, Clearinghouses, and Exchanges”. BIS central bankers’ speeches  1  When investor “A” decides to buy protection from bank “B” on exposure to a third company “X,” she may or may not explicitly take into account that in the event of default by X, B may in fact also be in trouble. Whether or not she does so would depend on the reason for the trade. If A wants default protection then that default correlation certainly should be taken into account2. But if, for example, the goal is just to reduce the price volatility of holdings of a certain corporate bond issued by X, this default correlation may not be seen as that relevant. As a practical example, take the case of a pension fund managing its corporate bond portfolio.