Transcript Slide 1
Maja Kadievska Vojnovik Vice-governor National Bank of the Republic of Macedonia The lessons from the Eurozone (EZ) crisis /policy responses 1.Growth model of GIIPS 2. Problems in the structure of the EZ 3. Mispricing of risk by capital markets 4. Crisis prevention and resolution mechanism needs to be in place before the next crisis 5. Surveillance and monitoring of regional financial markets should be strengthened 6. Banks need to be recapitalized quickly after crisis The future of the Euro The growth model of GIIPS (Greece, Ireland, Italy, Portugal and Spain) based on: Large external imbalances -large CAD financed by debt-creating flows; The falling labor productivity and rising labor costs; Lavish social security systems with inefficient governments - high and permanent deficits is NOT SUSTAINABLE. Solution: Austerity Programs and Structural Reforms!!! Unit Labor Costs (index base year 2005=100), 1990–2010 120 100 Greece Italy 80 Spain Ireland 60 German France 40 Source: OECD 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 20 Source: IMF 09/2009 06/2009 03/2009 12/2008 09/2008 06/2008 03/2008 12/2007 09/2007 06/2007 03/2007 12/2006 09/2006 06/2006 03/2006 12/2005 09/2005 06/2005 03/2005 12/2004 09/2004 06/2004 03/2004 115 12/2003 09/2003 06/2003 03/2003 120 Real Effective Exchange Rates Based on Relative Unit Labor Costs, 1990Q1–2011Q1 110 105 100 95 90 85 80 Greece Italy Spain Portugal Ireland German France Current Account % of GDP 10.00 5.00 0.00 -5.00 Greece Spain -10.00 Portugal Ireland Italy -15.00 Germany France -20.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: IMF Budget deficit as % GDP 10 5 Greece 0 Italy -5 Spain -10 Portugal -15 Ireland -20 German -25 France -30 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Eurostat Public Debt as % of GDP 160.0 1995 2001 2007 2010 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Greece Source: Eurostat Italy Spain Portugal Ireland Germany France A common monetary policy and currency without fiscal union, centralized budget authority or system of fiscal transfers across members to smooth out asymmetric shocks; Solution: European Governance Reforms In December 2011, announced a new "Fiscal compact“: Introduction of fiscal rules in national constitutions -the structural deficit not exceed 0.5% of GDP; European Court of Justice (Luxembourg) will be responsible for the proper transposition of this rule; Introduction of automatic sanctions for countries that violate the rules of the Stability and Growth Pact (deficit ceiling of 3% and the debt ceiling of 60%) automatic sanctions (0.2% of GDP, blocking money from the Structural Funds); numerical benchmark for the debt (1/20 to reduce annual average calculated for three years); European monetary unification brought convergence of interest rates among EZ members, but the financial integration did not automatically lead to the efficient allocation of capital. Solution: the risk assessment on country level Source: Bloomberg 01/2012 11/2011 09/2011 07/2011 05/2011 03/2011 01/2011 11/2010 09/2010 07/2010 05/2010 03/2010 01/2010 11/2009 09/2009 07/2009 05/2009 03/2009 01/2009 11/2008 Ireland 09/2008 15 07/2008 Portugal 05/2008 20 03/2008 10 01/2008 25 11/2007 30 09/2007 35 07/2007 05/2007 03/2007 01/2007 40 10 Year Government Bond Yields, January 2007–January 2012 Greece Italy Spain Germany France 5 0 0 12/2011 09/2011 06/2011 03/2011 Ireland 12/2010 1000 09/2010 Portugal 06/2010 1200 03/2010 600 12/2009 800 09/2009 7000 06/2009 1400 03/2009 1000 1600 12/2008 4000 09/2008 5000 06/2008 6000 03/2008 Greece - Sovereign Credit Default Swaps, December 2007–January 2012 12/2007 12/2… 09/2… 06/2… 03/2… 12/2… 09/2… 06/2… 03/2… 12/2… 09/2… 06/2… 03/2… 12/2… 09/2… 8000 06/2… 9000 03/2… 12/2… 10000 Italy Spain German France 3000 400 2000 200 0 Greece Italy 2007 2012 Spain Portugal Ireland German France Moody's A1 Aa2 Aaa Aa2 Aaa Aaa Aaa S&P A A+ AAA AA- AAA AAA AAA Fitch A AA- AAA AA AAA AAA AAA Moody's C A3 A3 Ba3 Ba1 Aaa Aaa S&P SD BBB+ A BB BBB+ AAA AA+ Fitch B- A- A BB+ BBB+ AAA AAA Source: Bloomberg Solution: Temporary, three-year lending facility- European Financial Stability Facility (EFSF), but more importantly - Permanent rescue fund, the European Stabilization Mechanism (ESM) in 2013. In 2012, EFSF and ESM will overlap with total ceiling of 940 billions euro Financial Assistance from other EZ governments and IMF Date agreed European Total IMF- Financial Financial Financial Assistance Assistance Assistance GREECE May 2010 € 80 billion € 30 billion € 110 billion IRELAND December 2010 € 45 billion € 22.5 billion € 67.5 billion € 52 billion € 26 billion € 78 billion PORTUGAL May 2011 GREECE Source: IMF July 2011/ February 2012 € 130 billion € 130 billion Solution: New supervisory framework: As from January 2011, the three European supervisory authorities (ESAs) and a European Systemic Risk Board (ESRB) were established to replace the former supervisory committees: European Banking Authority; European Securities and Markets Authority, European Insurance and Occupational Pensions Authority. The 2008-2009 financial crisis had deepen the already unsustainable fiscal positions; the sovereign debt crisis since the 2011 summer has triggered a dangerous feedback loop. Solution :Consensus on banking package for restoring confidence Guarantees on bank liabilities -to provide more direct support for banks in accessing term funding (as essential part of the strategy to limit deleveraging actions); The repetition of the 2008 experience with full national discretion in the setting-up of liquidity schemes may not provide a satisfactory solution under current market conditions. Therefore a truly coordinated approach at EUlevel is needed regarding entry criteria, pricing and conditions. Capitalisation of banks : Quantitative capital target of 9 % have to be attained by 30 June 2012, based on plans agreed with national supervisors and coordinated by EBA. National supervisory authorities, under the auspices of the EBA, must ensure that banks’ plans to strengthen capital do not lead to excessive deleveraging Financing of capital increase: Banks should first use private sources of capital, including through restructuring and conversion of debt to equity instruments. Banks should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained. If necessary, national governments should provide support , and if this support is not available, recapitalisation should be funded via a loan from the EFSF in the case of EZ countries. Any form of public support, whether at a national or EU-level , will be subject to the conditionality Country Germany Moody's S&P 2007 Aaa AAA 2012 Aaa AAA France Moody's S&P 2007 Aaa AAA 2012 Aaa AA+ The major banks by assets size Deutsche Bank AG Commerzbank AG DZ Bank AG Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch AAA Aa1 AA AAAa3 A A Aa3 A+ A+ AAA Aa3 A+ A+ A2 A A+ Aa3 AAA+ BNP Paribas SA Credit Agricole SA Societe Generale Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch AAA Aa1 AA+ AA Aa1 AAAA Aa1 AA AA AAA Aa3 AAA+ Aa3 A A+ A1 A A+ Banco Bilbao Vizcaya Spain Banco Santander SA Argentaria SA Bankia SA Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch 2007 Aaa AAA AAA Aa1 AA AA Aa1 AAAA2012 A3 A A Aa3 A+ A Aa3 A A Baa3 BBBBBB+ Banca Monte dei Paschi di Italy UniCredit SpA Intesa Sanpaolo SpA Sienna Spa Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch 2007 Aa2 A+ AAAa2 A+ A+ Aa2 AAAAAa3 A A+ 2012 A3 BBB+ AA2 BBB+ AA2 BBB+ ABaa1 BBB BBB Portugal Caixa General de Depositos SA Banco Comercial Portugues SA Banco Espirito Santo SA Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch 2007 Aa2 AAAA Aa1 A+ AAAa3 A A+ Aa3 A A+ 2012 Ba3 BB BB+ Ba2 BBBB+ Ba3 B+ BB+ Ba2 BBMerrill Lynch International Ireland Bank Limited AIB Group Depfa bank plc Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch 2007 Aaa AAA AAA A1 A+ Aa2 A+ AAAa3 A+ AA2012 Ba1 BBB+ BBB+ Baa1 A Ba2 BB BBB Baa3 BBB BBB+ Greece National Bank of Greece SA EFG Eurobank Ergasias SA Alpha Bank AE Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch 2007 A1 A A Aa3 BBB+ AAa3 AA A1 BBB+ A2012 C SD BCaa2 CCC BCaa2 CCC BCaa2 CCC B- Source: Bloomberg Greece Italy Alpha Bank AE Intesa Sanpaolo SpA EFG Eurobank Ergasias SA UniCredit SpA National Bank of Greece SA Banco Bilbao Vizcaya Argentaria Intesa Sanpaolo SpA UniCredit SpA Banco Santander Banco Bilbao Vizcaya Argentaria Commerzbank AG Banco Santander Commerzbank AG Deutsche Bank AG Deutsche Bank AG Societe Generale Societe Generale Credit Agricole Credit Agricole BNP Paribas SA BNP Paribas SA - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 - 10,000 20,000 30,000 40,000 50,000 60,000 Portugal Ireland Intesa Sanpaolo SpA Intesa Sanpaolo SpA UniCredit SpA UniCredit SpA Banco Bilbao Vizcaya Argentaria Banco Bilbao Vizcaya Argentaria Banco Santander Banco Santander Commerzbank AG Commerzbank AG Deutsche Bank AG Deutsche Bank AG Societe Generale Societe Generale Credit Agricole Credit Agricole BNP Paribas SA BNP Paribas SA - 50 100 150 200 250 300 350 - 400 500 Spain Intesa Sanpaolo SpA UniCredit SpA Banco Bilbao Vizcaya Argentaria Banco Santander Commerzbank AG Deutsche Bank AG Societe Generale Credit Agricole BNP Paribas SA - 10,000 20,000 30,000 40,000 50,000 60,000 1,000 1,500 2,000 2,500 “The euro is at the core of our European project of peace, stability and prosperity. We agreed today on a comprehensive set of measures to restore confidence and address the current tensions in financial markets. These measures reflect our unwavering determination to overcome together the current difficulties and to take all the necessary steps towards a deeper economic union commensurate with our monetary union”. Euro Summit (Brussels 26 October 2011) Disagreements among EZ core countries and ECB over the appropriate response; Slow and complex EU policy-making process; Domestic political obstacles/ number of protests and fall of many governments ; Political resistance to providing financial support to countries in trouble/ critics opposed to the idea of rescuing countries without adequate budget discipline. ECB Support: In May 2010, the ECB began buying government bonds on secondary markets in an attempt to stabilize bond yields; The flexibility in its short-term refinancing operations was increased (accepting the securities, including government bonds, with lower credit ratings). Long-term refinancing operations (LTRO): 1. In December 2011, providing loans to more than 500 Eurozone banks, totaling €489 billion 2. In February 2012, which was even bigger, totaling an additional €530 billion and had more than 800 banks participating. Losses on Greek Bonds; The biggest sovereign-debt restructuring ever, covering €206 billion of debt, holders of €172 billion of bonds agreed. Collective-action clauses boost the participation to €197 billion, 96% of the total, triggering credit default swaps. With this, Greece gets its second bailout. Possible only if: The policymakers address the underlying causes – past and future imbalances in the EZ; Fiscal consolidation in EZ and painful structural reform in the periphery are successfully completed; For the EZ crisis to be over (in the absence of Eurobonds or fiscal transfers), some of Europe’s debt would need to be written down; The sovereign banking feedback loop need to be broken and The EZ would need to have a credible growth strategy going forward.