As long as the probability distribution is sufficiently far to the right – in other words – well within positive territory so that there is virtually no risk that the firm is insolvent, lenders will generally be willing to lend. So what happens in a financial crisis? First, the probability distribution shifts to the left as the financial environment deteriorates and the financial firm takes losses that deplete its capital. Second, and even more importantly, the dispersion of the probability distribution widens – lenders become more uncertain about the value of the firm. These two phenomena are shown together in Figure 2. A lack of transparency in the underlying assets will exacerbate this increase in dispersion. As the degree of dispersion widens, a portion of the probability distribution falls into negative territory. This means that there is a real risk of loss for unsecured creditors if the firm were forced to liquidate its assets. Finally, in a crisis, unsecured lenders become more uncertain about others’ assessment of the probability distribution. For example, if creditor A believes the probability distribution  4  BIS Review 143/2009  looks like Figure 1, but at the same time is concerned that creditor B views the probability distribution as looking like Figure 2, creditor A may pull back. If there is a risk creditor B and others will not lend, the firm may not receive sufficient funding.
It is however a present concern to the extent that recent signs of increasing labour market shortages and decreasing FDI inflows question the capacity to maintain GDP growth at the high levels recorded in the past. Addressing these risks and challenges will require the conduct of prudent macroeconomic policies insuring short-term stabilisation, with fiscal authorities avoiding pro-cyclical loosening and generous spending policies, and monetary authorities preserving price stability and guaranteeing financial stability. However, macroeconomic policies alone are not sufficient to improve the long-term growth potential: they are aimed at fostering a stable and transparent business environment, but have to be supplemented by the implementation of structural policies designed to enhance labour market participation, labour mobility, competition in goods market, investment in education, R&D and infrastructure. It appears very clearly that the challenge of a stable and sustainable path for the catching-up process is closely interlinked with the challenge of a successful integration in the Euro area. For that purpose, it is in the interest of the New Member States themselves to be patient while accelerating structural reforms in order to meet both these challenges. Euro area accession will come in due course as the well deserved reward for the efforts of each country in creating the conditions of its own long-term economic prosperity. I look forward to such accessions. BIS Review 115/2007  5