Transcript Labour Market

Jaromír Šindel
ECES
The Puzzles of Central and Eastern Europe Transformation and Integration
Financial and Bank Crisis
ECES, Prague
• Crisis Indicators
– ...
– Interest rate´s behaviour during crisis
• 1994, 1997, 1998
– Russian Crisis
• Case studies in CEE countries
The Puzzles of Central and Eastern Europe Transformation and Integration
Topics
– Hungary, Czech Republic, Estonia
ECES, Prague
• Banking sector
Crisis Indicators
• Traditional Indicators
– Gross debt / GDP (40 %)
– CAB / GDP (-5 %)
– Debt service / GDP (5 %)
– Debt service / export (25 %)
– Shortterm debt / Debt (40 %)
– Import Cover (3-6 months)
Crisis Indicators
• Modern Indicators
– divergence of RER
– M2 / International Reserves
– Real Export Growth
– Real Interest Rate (Risk Premium)
– Terms ot Trade
– Domestic Credit Expansion
Why high interest rate during crisis –
elimination of short selling
• Short-selling
– Get loan in home currency, spot purchase of
foreign currency and make deposit in foreign
currency
• (1+IRh) = E (ER) / ER * (1+IRf)
– Costs on the left side
– Yields on the right side
1994, 1997, 1998
• 1994 Mexican Crisis
– Hungary
• 1994 Thai Crisis
– Czech Republic
• 1998 Russian Crisis
– The Baltic states, Slovakia
Source: A. Babić, A. Žigman: Currency Crises: Theoretical and Empirical Overview of the 1990s
Currency Crisis in CEE –
Hungary
• Current account deficit
– First of TE countries with serious problem with CA
sustainability
– 20 % drop of exports in 1993 and 14 % increase of
imports
• Poor harvest, new bankruptcy law – elimination of many exporting
firms
• High Foreign Debt from 1970´s
– Willingness to pay
– High debt service ratio to exports
• Stop of FDI inflow in 1994
– Stop privatization before election, but need to finance
debt
Currency Crisis in CEE –
Hungary
• Twin deficit
– Fiscal and Current account deficit
• High Foreign Debt from 1970´s
– Willingness to pay
• No real appreciation
– Crawling peg
– Compare with Czech
Crown
Source: Frait, Komárek (1998)
Currency Crisis in CEE –
Hungary
• 1994 Mexican Crisis
–  risk aversion in TE
– But FX reserves and exchanger rate arrangements
• 1995 Stabilization program
– Fiscal stabilization,
– privatization,
– structural reforms
Currency Crisis in CEE –
Czech Republic
• Current account deficit
– 8,3 % of GDP in 1996
– Strong domestic demand and lower productivity
(competitiveness, ULC)
• Labour producitivity: 136 %
1997/1992
• Labour costs:
163 %
1997/1992
• Real exchange rate appreciation 134 %
1997/1992
• Domestic Credit Expansion
– No (no consumption loans, no bubbles)
– BUT the bad situation in banking sector was unveal
• Substandard (overdue) loans 37 % in 1996
• Privatisation was so far – „Banking socialism“
Currency Crisis in CEE –
Czech Republic
• Public budget
– Expected deficit (surplus for years) no twin deficit
like in Hungary (lower attention to danger)
• Political situation
– Slim majority  unsuccesfull economic pocket
• Failed in comparison with Slovakia or Hungary
• High Investment Ratio
– 30 % of GDP (20-25 % other TE countries)
– BUT no equivalent GDP growth
• Public investment – energy (nuclear plant)
• Environmental investments
Currency Crisis in CEE –
Czech Republic
• from 1996 „problems“ with short-term capital
– Foreign reserves falling from July 1996
• Defense of fixed ER
– Increasing ratio of short-term debt to debt
• „bad“ mix of Monetary and Fiscal Policy
– Reinforced by political situation – slim majority
• 1997 Thai Crisis
– 30 % of GDP (20-25 % other TE countries)
– BUT no equivalent GDP growth
• Public investment – energy (nuclear plant)
• Environmental investments
Russian Currency Crisis
• 1998 was announced emergency
economic policies
– …, restructuring of public debt, 90-day
suspension of paying foreign debt, floating
the rouble
– Led to a loss in international confidence in
Russian fiscal policy, decreased FX
reserves, inability to pay off treasury bills
– Depreciation of currency and widespread
effects on main partners – also Baltic
countries – Estonia, Latvia, Lithunia
Source: Liz Winters. Effect of Exchange rate Crises – Russian Currency Crisis.
Russian Currency Crisis
Nominal Exchange Rate of USD against the russian Rubble, 6/1995-6/1999 (monthly
average)
Source: A. Babić, A. Žigman: Currency Crises: Theoretical and Empirical Overview of the 1990s .
Russian Currency Crisis - Effects
Export partners before and after the Crisis, 1997-1999 (in %)
Russia was one
of the main
export partners
• the drop in the
russian demand
meant the drop
in baltic exports,
followed by
prodution and
GDP
Source: Lauri Taro -Baltic economies in 1998-1999: effects of the Russian financial crisis.
Russian Currency Crisis - Effects
Change in Industrial Production, 1997-1999 (in %)
Source: Lauri Taro -Baltic economies in 1998-1999: effects of the Russian financial crisis.
Russian Currency Crisis - Effects
GDP growth, 1996-1999 (in %)
Source: Lauri Taro -Baltic economies in 1998-1999: effects of the Russian financial crisis.
Russian Currency Crisis - Effects
Source: Lauri Taro -Baltic economies in 1998-1999: effects of the Russian financial crisis.
Russian Currency Crisis–
Focus on Estonia
• External balance
– Current account deficit
• Higher than Czech republic in 1996-1997
– Foreign debt
• Lower shortterm debt than Czech republic and Slovakia
• Low debt service to exports (2 %) x Czech republic (11,9 in 1996)
• Internal balance
– GDP growth - slowdown before 1997 (to prevent
overheating)
• Not like in Czech republic („bad“ economy policy mix)
– Good fiscal balance
– Banking sector
• Expansion, but very low everdue loans (restructuring of banking
sector after 1992 crisis)
Russian Currency Crisis–
Focus on Estonia
• Why not in 1994 and 1997
– Currency board had a strong credibility
• In Lithunia devaluation x no in Estonia
• Important in 1994 and 1997
– Current account = trade balance + income balance + …
• In 1996-1997 income balace of 20 % of current account deficit
• Most of it back as capital inflow
– Low share in foreign investor´s portfolios
• Very small economy small need of capital  low share in foreign
investor´s portfolios
Currency Crisis in CEE countries
International Reserves, 1991-1998 (in million USD)
Source: A. Babić, A. Žigman: Currency Crises: Theoretical and Empirical Overview of the 1990s .
Currency Crisis in CEE countries
Nominal exchange rate of the dollar against national currencies, 1991-1998
Source: A. Babić, A. Žigman: Currency Crises: Theoretical and Empirical Overview of the 1990s .
Currency Crisis –
change of Currency regimes
• Czech republic
– From fixed to managed float after 1997 Thai Crisis
• Slovakia
– From fixed to managed float after 1998 Russian Crisis
• Bulgaria
– From managed float to currency board
• Baltic states
– No change
Share of foreigners on equity in Czech Rep. and Hungary, 1993-1998 (in % at the
end of year)
Overdue loans in Hungary and Czech rep., 1993-1998 (% of all loans)
ECES, Prague
Note: Maďarsko = Hungary, ČR = Czech Republic.
Source: Polouček (1999) and Srholec, M. (2001), from Schejbal, J. (2002)
The Puzzles of Central and Eastern Europe Transformation and Integration
Bank sector – foreign owners and
overdue loans
• What to do with banking sector at
Cuba and China?
• Goals, solutions, reasons.
• State, private, foreign, bad loans,
…
The Puzzles of Central and Eastern Europe Transformation and Integration
Lessons for future.
• http://www.eizg.hr/hr/publikacije-fs/survey/6-chapter5.pdf
ECES, Prague