Transcript The Aftermath of Eurozone Sovereign Debt Crisis

NTU Finance
Conference
The Eurozone
Sovereign Debt Crisis:
Lessons for Taiwan
Sheng-Cheng Hu
Academia Sinica
2012.12.5
Outline
• Introduction
• Effects on the Taiwan Economy
• Implications and Responses
• Concluding Remarks
Introduction
• The global financial crisis: Immediate cause for
the Eurozone debt crisis to take place in 2010.
o Two-speed recovery as a result of concerted efforts of
major countries to aggressively pursue expansionary
fiscal and monetary policy.
o Five largest investment banks in the US disappeared
from the market. “The need to eliminate firms that are
effectively ‘too large to fail’ was the top lesson from
the recent financial crisis.” -Bernanke
o Many countries found their government debt soaring
because of the overuse of fiscal stimulus.
o Eurozone countries such as Greece, Ireland, Italy,
Portugal and Spain (hereafter GIIPS) required bailout
to avoid default of sovereign debt.
Introduction (cont.)
• Tri-lemma:
Main contributing factor for the
GIIPS sovereign debt crisis
o By joining the Eurozone, GIIPS gave up the monetary
policy power, and had to over-extend fiscal policy
tools to respond to the global financial crisis, resulting
in sharp rises in government deficits and debts.
o Greece, Italy, Portugal: Overburdened by social
insurance expenditures, the governments’ fiscal
conditions were already shaky before the global
financial crisis.
o Ireland and Spain: Government fiscal conditions were
relatively sound. Trouble came from asset bubbles
right before the global financial crisis.
Government Debt and Budget Balance
2007
2008
Govt
Debt
Surplus
/Deficit
Greece
105.4
Ireland
2009
2010
Average
2009-10
2011
Surplu
s/Defic
it
Surplus/
Deficit
Surplus/Deficit
Govt
Debt
-6.7
-9.7 -15.6
-10.6
160.8
-9.2
-13.1
24.8
0.1
-7.3 -14.2
-31.3
105.0
-9.9
-22.8
103.1
-1.5
-2.7
-5.4
-4.5
120.1
-3.9
-4.9
Portugal
68.3
-3.2
-3.7 -10.2
-9.8
106.8
-4.0
-10.0
Spain
36.3
1.9
-4.2 -11.2
-9.3
68.5
-8.5
-10.3
Japan
183.0
-2.1
-4.1 -10.4
-9.4
229.8
-10.1
-9.9
US
67.2
-2.7
-6.7 -13.0
-10.5
102.9
-9.6
-11.8
Taiwan
33.3
-1.4
-2.2
-4.1
40.8
-4.3
-4.6
% GDP
Italy
-5.2
5
Introduction (cont.)
• IMF’s estimate (GFSR 10/2012)：
o The total amount of GIIPS sovereign debt was
USD 4.64 trillion as of 2011
o Government demand for funds would be USD
1.07 trillion and USD 880.5 billion,
respectively, for 2012 and 2013.
• Despite the bailout packages and the
austerity programs, Eurozone debt crisis
will take 3 to 5 years to recover. During the
course, the crisis could turn out of control
because of the “game of chicken” played
by the relevant parties.
Introduction (cont.)
• The proposed “fiscal union”
and ‘bank
alliance”, if implemented, would turn the
Eurozone into a United Economic States
of Europe. However, unlike the US, it
lacks a democratic mechanism to balance
the diverse interests of its members. Its
success will depend on the willingness of
the wealthy members to share resources
with their less wealthy members, but not
necessarily on the participation of England.
Effects on the Taiwan Economy
•
•
•
Direct Exposure: Taiwan's direct exposure to Euro debt
was minimum - around USD 1.3 billion at the end of 2010.
Significant wealth effects of changes in exchange rates
and international asset prices on Taiwan’s holdings of
domestic assets and international investment position.
o Taiwan maintains a large annual excess saving, amounting
to an average of 9.5% of its GDP (TWD 1.23trillion or USD
41 billion in 2011).
o As of 2011, Taiwan held an international investment position
of USD 1.18 trillion (fifth in the world).
Trade effect : Sovereign debt crisis caused world
economic slowdown and thereby slowdown in Taiwan’s
exports and economic growth.
Effects on the Taiwan Economy
(cont.)

Worries about the Euro crisis and the US QE
policy together forced capital (hot money) to flow
to Asia, causing fluctuations in the currency
values and foreign exchange reserves in Asian
countries.



The value of the Taiwan dollar in terms of the USD went up
by 11% from July 2010 until July 2011.
Greater volatility in Taiwan’s foreign exchange
reserves: Compounded by Taiwan’s lowering the
inheritance tax, which induced Taishan to remit money
back to Taiwan).
Effects on Asset Markets: Stock and housing markets
2008M01
2008M02
2008M03
2008M04
2008M05
2008M06
2008M07
2008M08
2008M09
2008M10
2008M11
2008M12
2009M01
2009M02
2009M03
2009M04
2009M05
2009M06
2009M07
2009M08
2009M09
2009M10
2009M11
2009M12
2010M01
2010M02
2010M03
2010M04
2010M05
2010M06
2010M07
2010M08
2010M09
2010M10
2010M11
2010M12
2011M01
2011M02
2011M03
2011M04
2011M05
2011M06
2011M07
2011M08
2011M09
2011M10
2011M11
2011M12
2012M01
2012M02
2012M03
2012M04
2012M05
2012M06
2012M07
2012M08
2012M09
2012M10
Currency Value in terms of USD
(2010M7=100)
2010/8/4
130.000
125.000
120.000
115.000
2011M7
110.000
105.000
100.000
新台幣
95.000
人民幣
韓元
90.000
85.000
80.000
Exchange Rate and Change in FX
Reserves: Taiwan
15,000
115
2011M5
10,000
110
105
5,000
100
0
95
-5,000
90
Change in FX Reserves
-10,000
-15,000
85
80
Value of TWD (Index)
Capital Flows
10000
5000
Inflow
0
Financial Acct
Net Port Invest
-5000
-10000
-15000
Outflow
-20000
2008M01
2008M02
2008M03
2008M04
2008M05
2008M06
2008M07
2008M08
2008M09
2008M10
2008M11
2008M12
2009M01
2009M02
2009M03
2009M04
2009M05
2009M06
2009M07
2009M08
2009M09
2009M10
2009M11
2009M12
2010M01
2010M02
2010M03
2010M04
2010M05
2010M06
2010M07
2010M08
2010M09
2010M10
2010M11
2010M12
2011M01
2011M02
2011M03
2011M04
2011M05
2011M06
2011M07
2011M08
2011M09
2011M10
2011M11
2011M12
2012M01
2012M02
2012M03
2012M04
2012M05
2012M06
2012M07
2012M08
2012M09
2012M10
Stock Markets
250.00
200.00
150.00
2011M9
100.00
50.00
Taiex
Shanghai
DJ
0.00
Exchange and Asset Markets
(2010M7=100)
130.00
120.00
2011M7
110.00
100.00
Taiex
90.00
TWD
Housing Price
80.00
70.00
60.00
50.00
Taiex, Fx, HS price and RE loan
(%yoy)
100.00
80.00
Taiex
TWD
Housing Price
60.00
Ttl RE Ln
40.00
20.00
0.00
-20.00
-40.00
-60.00
2011M5
Effects on the Taiwan Economy
(cont.)


Capital Flow Effect: Outflow of long-term porfolio
Investment and inflow of short-term porfolio
investment.
Trade Effect: Europe is Taiwan’s fourth largest
export market, accounting for 10% of its total
exports. Taiwan also has substantial exports to
Europe indirectly through Mainland China, as
many of Chinese exports to Europe use Taiwanmade parts. (Europe is the largest trading partner
of China, account for 20% of its total exports).


The growth rate of Taiwan’s exports to Europe declined from
a peak of 49% in 2010M5 to double digit negative growth
rate in 2012.
The growth rate of total exports followed a similar pattern.
Taiwan’s Exports to Europe
100
16.00
80
14.00
60
12.00
40
10.00
20
8.00
0
6.00
-20
4.00
-40
2.00
% of Total (Right)
%yoy
年增率(%)
-60
0.00
Effects on the Taiwan Economy
(cont.)

Decline in Taiwan‘s economic growth rate:
Because of the decline in exports.

The growth rate for 2012 was forcasted to be 4.5%
originally before the start of the year, but has been
revised downward nine times by the DGBAS to 1.05%
as of 11/18/2012. It will be a challenge for the
economy to maintain the growth rate at 1% or higher.
Effects on the Taiwan Economy
(cont.)
• Since the global financial crisis, Taiwan’s
growth rate has been more volatile than its
competitors: A result of Taiwan’s heavy
dependence on exports and on the ICT
sector.
o Exports account for 75% of aggregate GDP.
o The GDP of the ICT sector accounts for 53% of the
manufacturing GDP.
o ICT exports account for 40% of total exports.
Aggregate & Sectorial Growth Rates
35
30
25
GDP
20
Manufacturing
ICT Sector
15
10
5
0
1981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011
-5
-10
Lessons from and Responses to the
Eurozone Debt crisis
• Importance of sound fiscal condition: 7uu
Financial soundness of social insurance
programs must be maintained.
o Excluding social insurance programs, the government
debt was 40.8%, and fiscal deficits were 3.38%, of its
GDP as of 2011. The European Stability and Growth
Pact requires that the government debt be less than
60%, and government fiscal deficits be less than 3%
of GDP.
o Because of rapidly aging of population, social
insurance programs are under financial stress. The
Labor Insurance Program is expect to run out funds
by 2027.
Government Debt and Deficits
Govt budget deficits
10
9
8
7
6
5
4
3
2
1
0
Govt budget deficits
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Govt gross debt
65
60
Govt gross debt
55
50
45
40
35
30
25
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Population Aging
Population Age
Structure(%)
Year
Life Expectancy
at Birth
0-14
15-64
65+
Male
Female
1970
39.7
57.4
2.9
66.7
71.6
2000
21.1
70.3
8.8
73.8
79.6
2010
15.8
73.5
10.7
76.1
82.7
2050
9.2
52.9
37.9
82.4
88.5
Lessons from and Responses to the
Eurozone Debt Crisis (cont.)
• Containment of asset bubbles.
o The central bank has been using selective
credit controls to contain housing bubble.
o New measures: Require reporting of actual
transaction prices in housing transactions.
Lessons from and Responses to the
Eurozone Debt Crisis (cont.)
• Balance between the efficiency of capital
allocation and potential instability due to rapid
capital flows.
o Taiwan has not imposed a tax on short-term capital
flows
o The central bank keeps a closed eye on some 20
FINIs which have frequently engaged in large
volumes of foreign exchange transactions.
Lessons from and Responses to the
Eurozone Debt Crisis (cont.)
• Balance between scale economy and
systemic risk. Scale economy is important
for both ICT and financial-service sector to
stay competitive in global markets.
Consolidation is thus required.
o Maintenance of good corporate governance is
important for avoiding “too large to fail”- Dodd-Frank
o Discouragement of leveraging of corporate
investment (Particularly ICT investment)
o Internationalization of stock markets to achieve risk
sharing in ICT
World Ranking of Banks
Ranking
1
2
7
Bank
Net worth
(TW$B)
Assets
(TW$B)
J P Morgan
Chase
HSBC
ICBC
Assets
(US$B)
2,468
1,724
17
1,408
24
Bank of China
1,278
25
China
Agricultural
Bank
1,298
132
Bank of Taiwan
160
178
181
Loans
(TW$B)
2,117
China
Construction
Bank
Taiwan
Cooperative
Bank
Mega Bank
Taiwan Land
Deposits
(TW$B)
245
3,772
131
3,189
2,079
118
2,701
94
2,180
1,783
158
106
2,203
2,185
76
80
1,545
1,902
1,329
1,701
Concluding Remarks
• In a volatile world economy, the government
•
•
•
must build and enhance capacity to monitor
and respond to changing macroeconomic
conditions.
Maintain fiscal health and avoid bubbles in
asset market.
Maintain balance between scale economy
and control of systemic risk.
Maintain long-term capital mobility while
containing rapid short-term capital flows.
Thank You !!!