Transcript XX. Financial and economic crisis 2008-2009

XX. Financial and economic crisis
2008-2009
XX.1 The Crisis
What actually happened? (1)
• Strong economic growth 2003-2007
• Both short and long term consumption massively financed
through debt
– Consumer credits, mortgages, etc.
• Sophisticated financial institutions (investment banks,
hedge funds) securitized debt, i.e. combined debts of
different qualities (i.e. with different quality of
guarantees) into new debt instruments that were sold as
allegedly safe investment
– Well rated by rating agencies
– Investors: commercial banks, insurance institutions, but also
states, municipalities, pension funds, endowments and many
others
What actually happened? (2)
• Securitized debt instruments: derived from original,
underlying debt (like mortgages) – derivatives
– originally guaranteed, i.e. collateralized, by some tangible
asset (houses, plots of land) or expected ability of
consumers to repay, etc.)
– when combined into new, derived instrument –
collateralized debt obligations, CDOs
• Financial engineering
– Complicated methods of CDOs valuation
– Ability to issue new CDOs, collateralized by the existing
one
• CDOs of 2nd, 3rd, etc. order
• Explosion of CDOs, speculation on their future values
What actually happened? (3)
• The trigger of the problem: underlying value of the
assets suddenly collapsed
– Typical bubble on the housing market, nothing new in
financial history
• Why such a big impact?
– Amount of CDOs issued
– Poor valuation and rating of the rating agencies
• Most of big financial institutions in US, UK and
elsewhere in the world suddenly discovered that their
investment might virtually ruin them
• Threat of collapse of the financial, mainly banking
system
Perrils
• Systemic importance of large financial institutions
• Potential consequences of the collapse:
– Population would loose savings
– Financial sector would stop to provide even basic
financing
– Huge impact on living standard
– Deep and protracted recession
• The ghost of Great Depression
– Many banks almost stopped financing – „credit crunch“
– Fall of both domestic demand and international trade
– In some countries (USA, UK, IRL and others) deep impact
on selected groups of the population
Immediate policy response
• Governments and Central Banks guaranteed either
restructuring of the debts or the debts as such
– Exceptions: i.e. collapse of Lehman Brothers
• Central Banks ready to purchase parts of commercial
banks’ portfolio
– Unprecedented increase of central banks’ balance sheets
• Monetary easing
• Fiscal stimulation
• Consequences: unprecedented debts, future exit from
monetary policies
Popular story today
• Usual explanation: financial institutions as a
main culprit
– Liberalization of financial markets in past three
decades
– New financial products and financial engineering
• Extreme profits and extreme bonuses
– Poor regulation of the financial sector
– Wrong system of incentives and „the greed“
• Financial sector and “bankers” as only cause of
the crisis?
Broader roots of the crisis
• Economic
– overly accommodative policy of FED
– Imbalances in global payments
• Political:
– Support to cheap credits and especially
mortgages
• Social:
– Consumerism of the modern society
Failure of macroeconomics?
• Some very unpleasant questions
– Why so few were able and willing to issue warnings?
– Why the most able institutions, responsible for
macroeconomic policies (i.e. FED), performed wrong
policies for such a long time?
– Why macroeconomic theory does not explain the
links between financial sector and real economy in a
more elaborated way?
XX.2 Impact on the real economy
Growth according IMF: World
IMF Forecast:
2010: 4.2%
2011: 4.3%
2015: 4.6%
10
Source: IMF WEO, April 2010
8
6
4
2
0
-2
AE
EMDE
!
World
-4
199201
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2015
Growth according IMF: Advanced
Economies
Growth according IMF: Emerging
Markets
Public finance deficit
% GDP
Source: IMF WEO Database, April 2010
Net debt
% GDP
Source: IMF WEO Database, April 2010
Other relevant data
Unemployment (%)
CPI (%)
11.0
10.0
10.0
8.0
9.0
8.0
6.0
7.0
4.0
6.0
5.0
2.0
4.0
0.0
199201
2002
2003
2004
2005
2006
AE
Euro
2007
2008
2009
2010
2011
2015
2002
EMDE
CEE
4
2
0
-2
-4
-6
-8
-10
-12
-14
2004
AE
2005
Euro
2006
2004
2005
Euro
2006
USA
2007
JPN
2008
2007
2008
2009
Asian NICs
USA
JPN
2010
2011
Source: IMF WEO Database, April 2010
2009
Asian NICs
Global trade, %yoy
6
2003
2003
AE
Net Lending (%
2002
3.0
2010
2011
Main conclusions
• The deepest recession since WWII
– But data seem to imply that the growth has recently
resumed
• The growth rates for next years will not go back to
pre-crisis levels
– In Europe further slow-down due to the present
uncertainty in Eurozone
• Increase of debts and deficits in all advanced
economies
• Unemployment rate up and will not diminish even
when the growth resumes
XX.3 Year 2010: end of recession?
Stock markets: S&P Composite
1,800
USA, S&P 500
1,600
1,400
EUR, S&P 350
1,200
1,000
800
600
350
300
250
200
150
100
EM, S&P BMI
Source: S&P website
Last observation:
USA, EM 7.5.2010
EU 10.5.2010
Capital: losses and write-offs vs.
newly raised
bn. USD, cumulative since Q3/2007
Source: Bloomberg, last observation 23.3.2010
Forex reserves, bn. USD
3000
2500
2000
1800
2399
1600
Stock
February 2010
2000
1775
1500
1400
Flows
1200
2005-2010
1000
800
999
1000
600
393
500
353
400
271
289
177
200
110
71
0
0
CHN
JPN
RUS
Taiwan
Korea
Source: national statistical institutes
CHN
JPN
RUS
Taiwan
Korea
US Treasuries holdings
bn. USD
Source: US Treasury, end of January 2010
Current account of BoP
bn. USD
Source: IMF WEO, April 2010
Gross national savings
% GDP
Source: IMF WEO Database, April 2010, IIF, March 2010)
W option?
• Stock markets rebounded, but volatility increased
recently
• Unclear if the banking sector problems resolved
– Germany!
• International imbalances, accumulated before the
crisis, still persist
• Strong vulnerability of - especially - European
economy
– Looming Greek crisis
• Asia, especially China to the rescue?
XX.4 The Impact on Central and Eastern
Europe
Basic facts (1)
External shock: slow-down of economic growth
•
Fall of demand for exports
•
Lower profits, lower wages: decline of consumption
•
General consequences of global financial crisis
– uncertainty : investment decline (including sharp decline
in FDIs)
– Collapse of equity markets
– Banking sector problems, „almost“ credit crunch
– Unemployment, social consequences, etc.
1.
Basic facts (2)
2. Macroeconomic destabilization
•
Lack of confidence, danger of “sudden stop” of external
financing : sustainability of (even short-term) debt
•
NPL share in domestic banks has dramatically increased (with
notable exception of some countries, namely CZ): impact on
large, Euro zone based banks
•
Dramatic decline of capital inflow in general
•
In some countries an outflow simultaneously
•
Global markets in 02-03/09: unified view on the region
– Not distinguishing enough among the countries
– General view influenced by the worst performing country
(“contagion” danger)
Spring 2009
• October 08 - March 09: speculation on
destabilization of some CEE economies +
unnecessary media hysteria with quite
unfortunate consequences
– Depreciation of all floated currencies in the region
– Real economy adjustment more pronounced for
economies with pegged currencies
• Problems of some short-term sovereign bonds
issues, increase of spreads
– All this at quite low inflation
• Slow pass-through into prices + decrease of commodity prices
Economic policy difficulties
Contradictory requirements on economic policy
• General impact of the crisis:
– Monetary easing (including so called non-traditional steps)
• Region's Central Banks could have - at the beginning - decreased interest
rates disregarding the depreciations (on the contrary, some positive
effects on exports)
• Fiscal policy pressure (higher social expenditures, automatic stabilizators,
calls for fiscal incentives)
– Generally: anti-cyclical policies required
• Short-term destabilization:
– Very restricted space for increase of deficits, but even - at least
within some period - for monetary easing as well
CEE: GDP growth, %yoy
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
2006
BG
CZ
2007
EST
2008
LAT
LTU
2009
H
2010
PL
RO
2011
SVK
SLO
CEE: GDP growth, %qoq
Other relevant data
Spreads
CPI, %, yoy
2000
10
max. 4200
1600
8
1200
6
4
800
2
400
0
0
-2
2004
2005
2006
2007
2008
2009
2010
2-Jun-08
24-Sep-08
CZ
Source: IMF, W EO, updat e July 2009
AE
Eurozone
EM
PL
SK
RO
EST
10-May-09
LAT
LIT
1-Sep-09
UKR
CEE
Nominal exchange rates
30-05-08 = 100
150
HU
16-Jan-09
REER, 1999 =
100
200
180
140
130
160
120
BG
LV
140
CZ
PL
EE
RO
HU
SI
LT
SK
110
120
100
100
90
80
30-May-08
80
5-Sep-08
HUF/EUR
12-Dec-08
CZK/EUR
20-Mar-09
PLN/EUR
26-Jun-09
RON/EUR
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Eurostat
VII-XII/2009
• Stabilization sui generis
– Huge contraction of economic activity
• Some countries - support from international
institutions
• Currencies and debt financing under control
XX.5 Where are we today
(2011)?
Global economy
• Behind the worse times
• In 2011: slight slow-down, in 2012 new
acceleration
• 2010-2012: growth above trend level of past
20 years
• 2011-12: closing the growth gap between
advanced (AE) and emerging economies (EM)
Global GDP growth, %yoy
Global economy: other basic data
Inflation, Average consumer prices (%)
General government net lending (%HDP)
Unemployment (% of total labor force)
General government gross debt (%HDP)
Production gap
world, advanced and emerging economies
US economy: surprise on the upside?
• In 2012: approaching 4% growth trajectory
• Recent growth: subsiding fiscal stimulation
and stock replenishment
• Since 2011: final demand picking up
– Lower pace of private sector deleveraging
– Lower debt/income ratios
– Improving credit quality
– Declining financial balances
Emerging economies:
barriers, inflation, but still solid growth
• Faster growth than AE, but some slow-down
• Brazil: from 7.5% in 2010 to 4.3% in 2012
• China and India: “stagnation” slightly bellow
10%, resp. 8%
• Only Russia will generate faster growth, but
from much lower base: 4.0% in 2010, 5.6% in
2012
• Closing the production gap completely during
2012
– Inflationary pressures
Europe (1)
• Burdened by the crisis in the periphery countries
…
• … but it does not entail the crisis of the
European economy
• Whole EU 27: slight acceleration from 2.0%
growth in 2010 to 2.2% both in 2011-12
• Euro zone growth figures lower (1.6% in 2011,
1.4% in 2012)
Europe (2)
• Deep differences behind aggregate figures
• Very low growth of peripheral countries, Greece
and Portugal around stagnation
– Need for substantial deleveraging and structural changes
• Return to normality in aggregate demand
structure
– Fiscal stimulation fading away, public expenditures decline
– Recovery in some countries: increase of household demand and in
Germany and Scandinavia, also increase of private sector
investment demand
Europe (3)
• Benefiting from US and EM growth, but
unequally
– winners: exporters of capital goods (Germany,
Scandinavia, northern Italy) + CEE manufacturing
sub-suppliers (Poland, Czech Republic, Slovakia, to
lesser extent Hungary)
• .. and watch UK!
European growth
Euro zone: growth divergence
Europe: other basic data
Inflation, Average consumer prices (%)
General government net lending (%GDP)
Unemployment (% of total labor force)
General government gross debt (%HDP)
Central and Eastern Europe
• Uneven recovery, differentiation centered around
– Balance sheet strength
– Domestic financial conditions
• Two groups of countries
1. Strong balance sheet and easy financial
conditions – outperforming countries: PL, CZ, SK,
SLO
2. Balance sheet constraints (both public and
private) and/or tight fiscal conditions – lagging
behind: H, RO, BG, Baltic states
CEE: Economic growth
CEE: other basic data
Inflation: CPI (%yoy)
Net government lending (% GDP)
Unemployment, %
Gross debt (% GDP)
Current account (% GDP)
XX.6 Conclusions
• Largest depression since 1930
• Rescue policy operations prevented the
catastrophe
– Recapitalization and liquidity provisions to ailing
banks
• Succesfull in the short-term, moral hazard, longer term
impact?
– Monetary and fiscal stimulation of AD, mixd
experience
• Montary – clearly super-imporatnt, but again: moral hoazrd
plus long term inflationary consequences
• Fiscal – less clear impact, value of fiscal multipliers in
different countries?, sharp increase of decidits and debts