ANNUAL REPORT 2008 - Polymer Bank Notes of the World

generally tighter financing conditions and theslowdown in economic activity. Although attimes the prevailing financial tensions had asignificant impact on those specific componentsand counterparts of M3 that were most closelyrelated to the nature of the turmoil (e.g. holdingsof money market fund shares/units), the financialturmoil did not, overall, give rise to sharpbreaks in the moderating trend of broad moneyand credit growth. Meanwhile, the results ofthe Eurosystem’s bank lending survey suggesta progressive tightening of credit standardsover the course of the year. For a more detailedanalysis of the impact that the financial turmoilhas had on monetary analysis at the euro arealevel, see Box 1.Box 1THE IMPACT OF FINANCIAL MARKET TENSIONS ON MONETARY DEVELOPMENTSThe financial tensions that started in August 2007 have had a profound impact on shortertermdevelopments in some items on the MFI balance sheet, leading in a number of cases tosignificantly higher volatility and changes in the direction of growth. This box discusses examplesof such visible effects in different phases of the period of tension. Three broad phases are usedas reference points: the phase in which the tensions started, covering the period from August2007 to February 2008 (including the uncertainties that prevailed at the end of 2007), the phasefrom March 2008 to mid-September 2008, and the phase from mid-September 2008 onwards, inwhich the tensions intensified.Visible effects on the components of M3One example of the financial tensions having a clear impact on the components of the monetaryaggregate M3 is their effect on marketable instruments such as money market fund shares/units orshort-term MFI debt securities. The volatility ofthe monthly flows into/out of these instrumentshas increased, although there have been distinctperiods of outflows and inflows (see Chart A).That increased volatility has coincided withsubstantial declines in the annual growth ratesof these instruments.Chart A Monthly flows into or out of moneymarket fund shares/units and short-termMFI debt instruments(EUR billions; adjusted for seasonal and calendar effects)30money market fund shares/unitsshort-term MFI debt instruments30The increases in uncertainty observed duringthe first phase of the tensions were reflectedin sizeable outflows from money market fundsboth at the very start of the tensions in August2007 and again in December 2007, driven byconcerns about the exposure of some euro areamoney market funds to asset-backed securities.However, these outflows appear to have beenreversed in subsequent months, and the reboundin January 2008 was the largest inflow recordedsince the start of Monetary Union. In the secondphase, the monthly flows were mostly negative20100-10-20-30Jan. Apr. July2007Source: ECB.Oct.Jan.Apr. July2008Oct.20100-10-20-30ECBAnnual Report200827