This is positive news, before reform action at the national level is ultimately the most important for getting the crisis behind us. Substantial progress can be seen most clearly in the development of current account balances. Much of this was driven by an inevitable drop in domestic demand, but we have also seen strengthening exports in a global environment that is not really buoyant. This indicates that the countries’ efforts to rebalance their economies are starting to bear fruits. Part of this picture is also the partial reversal of previous losses of competitiveness, but here the pace of progress varies across countries. 5  See D. Ioannou and L. Stracca (2013): “Have euro area and EU economic governance worked? Just the facts”, European Journal of Political Economy, forthcoming. BIS central bankers’ speeches  5  Fiscal balances have also shown strong improvements. For example, Greece’s structural primary balance has improved considerably, though the fiscal situation is still facing big challenges. At the same time it is positive to see that the general upward trend in private sector indebtedness has been halted in most countries, both in the household and the corporate sector, including the financial sector. Last but not least, structural reforms have gathered pace. The countries under an adjustment programme have taken many initiatives to make their economies more flexible and marketoriented, thus sowing the seeds for better performance and increased competitiveness in the future.
Moreover, the shape of the underwater part can be difficult to judge by looking at the section which is visible above the surface. This is in my view a useful metaphor, because as the crisis gradually unfolded, a chain of unexpected problems came to the surface and vulnerabilities that were previously underestimated became apparent. Let us consider first the tip of the iceberg, namely the liquidity crisis. Tensions in money markets erupted in August 2007 when the US mortgage market, which was at the epicentre of a complex network of financial derivative products held globally, started to un-ravel. Liquidity in interbank markets worldwide dried up as market participants became paralysed by uncertainty. The key problem was that counterparty risk – which had hitherto remained  BIS central bankers’ speeches  1  limited – suddenly increased in great proportions because the distribution of risk exposures to US subprime mortgage markets was markedly opaque. This led some market segments to partially freeze and others to close completely. This is where the second layer of the iceberg comes onto the stage. The collapse of Lehman Brothers in the autumn of 2008 triggered an exceptionally abrupt re-pricing of risks globally. It led to a very significant intensification of the financial crisis; to a temporary freeze in trade financing and a global trade decline; to a curtailment of credit and domestic demand; and, ultimately, to a severe decline in global demand and output.