International financial markets have moved from a situation of widespread risk undervaluation to one in which extraordinary caution is exercised in their evaluation. Past experience has clearly shown the tendency of markets to overreact. It is even possible that certain recent developments reflect, at least partly, an excessive reaction. But it is unreasonable to expect that, once the situation has returned to normal, international financing conditions will simply be as they were prior to the summer of 2007, which nobody today hesitates to qualify as excessively lax. Likewise, few question the fact that the expansion of the balance sheets of a large number of major financial institutions exceeded limits which should not have been overstepped. The current deleveraging process may initially reflect the correction of some of the excesses committed. But taking a broader view, it also reveals a more fundamental movement towards a general reduction in the debt levels of financial intermediaries and the containment of credit flows, the effects of which must likewise be felt by the ultimate borrowers, namely households and firms. Finally, I should point out that the magnitude of the imbalances generated and the scale of intervention designed have prompted a necessary pause for reflection on the role the economic authorities should play in developing and supervising financial markets.
For the moment, however, I shall simply reiterate that one of the aspects highlighted by the current financial crisis is how important it is for central banks to have the appropriate instruments with which to manage their liquidity provision policies with sufficient flexibility. 2  BIS Review 122/2008  And all the more so in the presence of turmoil which, as at present, is profoundly altering the operation of the channels through which liquid resources are normally re-distributed among the various banks that apply for them. In this respect, it is widely acknowledged that the Eurosystem’s monetary policy operational framework is allowing euro area banks' liquidity requirements to be met, thereby preventing the emergence of additional pressures that might exacerbate the situation on financial markets. In any event, returning to the most important macroeconomic developments that will influence the performance of the Spanish economy, it is clear that financial conditions in the euro area, as in the rest of the world, have tightened notably. Such tightening has compounded the adverse effects of the oil and commodities shocks on agents' real incomes and output capacity. The latest data, for the second quarter of the current year, show how the growth rate in the euro area has weakened to 1.4%, standing below potential. The latest ECB projections pointed to increases of between 1.1% and 1.7% this year, and between 0.6% and 1.8% in 2009, subject to considerable uncertainty and to downside risks that have increased in recent weeks.