In fact, these events have taken place at a time when the Spanish economy, too, continues to show considerable buoyancy that is prolonging its already long expansionary phase. Output grew in the first half of this year at a rate of around or slightly above 4% (in line with  BIS Review 134/2007  3  the performance in the closing months of 2006) and the vigour of activity was compatible with a more even balance between domestic and foreign sources of spending. In particular, the contribution of net external demand, which trimmed two percentage points from growth in certain months of 2004 and 2005, improved in 2006 and continued to do so in the first half of this year. At the same time, the share of business investment in domestic demand has continued to rise at the expense of private consumption and residential investment. The process of normalisation of monetary and financial conditions that commenced at the end of 2005 has contributed effectively to achieving this more balanced composition of spending. Moreover, the healthy performance of the world economy in 2006 and, in particular, the recovery of the euro area have spurred exports after several years of weakness. On the supply side, the growing availability of labour resources in a highly expansionary demographic setting helped to smooth the adjustment of activity to this robust demand, preventing excessive cost and price pressure from building up.
The increase in doubtful assets and defaults in US mortgages has set in motion a global process of upward revision of credit risk premiums, which in the climate of economic boom of recent years had sunk to very low, barely discriminatory levels, prompting what was probably excessive investment in potentially high-risk activities. These investments were further driven by the proliferation of new financial intermediaries specialised in the credit risk transfer markets to which I referred earlier. In particular, in the current bout of turbulence a major role has been played by institutions that raise funds by issuing very short-term fixed-income securities and use the proceeds to acquire structured products linked to long-term loans, including US sub-prime mortgages. The liquidity risks associated with such practices have been clearly under-estimated by these specialised institutions. And the consequences have been felt in the money markets because some credit institutions agreed to provide liquidity to these specialised institutions if, upon maturity, the latter did not manage to roll over the funds raised via the issuance of securities. This led to a serious liquidity crisis in the money markets of a good number of industrialised economies, including the euro area. Central banks, and the ECB in particular, reacted rapidly and implemented emergency processes to inject the amounts of liquidity demanded by the market. This prevented the lack of liquidity from compounding the crisis and sent a message of calm and reassurance to the markets.