Transcript REO Fall 2010 - Caribbean Development Bank

The Global Financial Crisis: Why It Happened, and
Options for National and International Policy Change
A comparative overview of the crisis and
macro-economic policy responses so far
Trevor Alleyne
Western Hemisphere Department
International Monetary Fund
Barbados
January 25, 2011
The world is recovering from the great recession,
but huge challenges remain

The impact of the crisis

How the crisis happened

Why this recession is different

The causes of the crisis

Policies to sustain the recovery

Lessons from the crisis

Main challenges faced by the Caribbean
2
The Crisis—Impact on Growth
Global growth fell sharply during the crisis everywhere in the world
3
Global GDP Growth
(percent, quarter-over-quarter, annualized)
14
IMF Forecasts
12
8
Emerging and
developing economies
6
World
4
Advanced economies
10
2
0
-2
-4
-6
-8
-10
2006
07
08
09
10
11
Source: IMF WEO (October 2010).
3
The Crisis—Impact on the World


Wiped out over $2 trillion in bank assets
Plunged most of the world into a global recession
4
The Crisis—Impact on the World
Over 30 million more people became unemployed
(ILO)
About 64 million more people have fallen into extreme
poverty by 2010 (World Bank)
30-50 thousand more babies may die in Africa in 2010
(World Bank)
5
The Crisis—Impact on Unemployment
Unemployment rose sharply in developed and developing countries
Global Unemployment Rate
(percent)
8.50
Onset of the crisis
8.00
Advanced Economies
7.50
Emerging and Developing Countries
7.00
World
6.50
6.00
5.50
5.00
4.50
2006
2007
2008
2009
Source: IMF WEO (April 2010).
6
The Crisis—Impact on the Caribbean
Severe recession followed by a slow recovery of growth
Caribbean: Real GDP Growth 1/
(annual percentage change)
20
15
20
15
TTO
10
10
VCT
SUR
5
GUY
0
-5
SUR
0
BLZ
BHS
GRD
5
ATG
-10
-5
-10
ATG
-15
-15
2006
2007
2008
2009
2010
Source: IMF WEO (October 2010).
1/ Caribbean countries include Antigua and Barbuda, Bahamas, Barbados,
Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St.
Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
7
The Crisis—Impact on the Caribbean
… higher unemployment…
Caribbean: Unemployment Rate 1/
(percent)
20
20
BHS
BHS
15
SUR
15
BLZ
BLZ
10
5
10
TTO
TTO
TTO
5
TTO
TTO
0
0
2006
2007
2008
2009
2010
Source: IMF WEO (October 2010).
1/ Caribbean countries include Bahamas, Barbados, Belize, Jamaica, Suriname,
and Trinidad and Tobago. Data for ECCU countries are not available.
8
The Crisis—Impact on the Caribbean
… and a sharp rise of public debt/GDP ratios
Public Debt 1/
(percent of GDP)
250
200
250
KNA
KNA
KNA
KNA
200
KNA
150
100
150
86.4
78.6
79.8
87.1
90.1
50
100
50
SUR
0
2006
SUR
2007
SUR
2008
SUR
SUR
2009
2010
0
Source: IMF WEO (October 2010).
1/ Caribbean countries include Antigua and Barbuda, Bahamas, Barbados,
Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St.
Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
9
The Crisis
Let’s look at where the crisis began…
In U.S. and European banks
10
Crisis starts in advanced countries
Lots of
liquidity
sloshing
around
Excess risk
Weak regulation
Weak supervision
Asset
bubbles
Advanced economies
Banking
crises
Credit
crunch
Recession
11
Advanced economies affected
(2009 growth rate)
-6.8
-2.5
-2.6
-5.1
-1.4
-4.9 -4.7
-1.9
-4.1
-4.1 Euro Area
0.2 -5.2
0.8
-1.9
-2.8
-1.3
1.2
-1.6
Source: IMF WEO (October 2010).
12
Crisis spreads to emerging economies
Advanced economies
Asset
bubbles
Banking
crises
Credit
crunch
Recession
Trade collapsed - Capital flows stopped
Emerging economies
Credit
crunch
Recession
13
Emerging economies affected
(2009 growth rate)
-13.9
-18.0
-14.8
-7.9
1.7
-15.1
-6.3
-7.1
v
-4.7
9.1
-3.4
5.7
-6.5
-3.3
-2.2
-1.7
0.8
4.5
-0.2
0.9
1.1
-1.5
-1.8
0.9
Source: IMF WEO (October 2010).
14
Low-income countries
Advanced economies
Asset
bubbles
Banking
crises
Credit
crunch
Recession
Trade collapsed - Capital flows stopped
Emerging economies
Credit
crunch
Recession
Low-income economies
Recession
15
Why is this recession different?

Recessions associated with financial crises are severe
and recoveries from such recessions are typically slow.
These features become more pronounced if in addition
the recession is global.

Countercyclical policies are helpful in ending recessions
and strengthening recoveries. Their effectiveness
depends on the type of recession.
16
Features of Recessions and Recoveries Depend
on the Type of Recession…
Recoveries
Recessions
Time until recovery to previous peak
(quarters)
Output gain after four quarters (percent from
trough)
Output loss (percent from peak)
Duration (quarters)
All recessions
All recessions
Financial
crises
Financial
crises
Highly
synchronized
recessions
Highly
synchronized
recessions
Financial
crises which
are highly
synchronized
Financial
crises which
are highly
synchronized
0
2
4
6
8
0
2
4
6
8
17
Policies Help Shorten Recessions…
Fiscal Stimulus is Effective in Financial Crises…
Probability of remaining in a recession
beyond a certain number of quarters
1.0
Financial crises
0.8
Financial crises with
high fiscal response
Full sample
0.6
0.4
0.2
0.0
0
1
2
3
4
5
6
7
8
9
10
Quarters
18
In the Caribbean, high public debt/GDP ratios have
weakened growth and narrowed the fiscal space
Growth has been weaker in
countries with higher debt levels...
... where fiscal space remains
constrained.
Change in Primary Deficit and Primary
Expenditure Growth, 2010
Public Debt Burden and Real GDP Growth
6
6
Average real GDP growth, 2009–10
Change in primary deficit (percent of GDP)¹
4
Real primary expenditure growth minus
potential GDP growth (percent, right scale)
4
DOM
2
2
10
1
5
0
0
0
-2
-1
-5
-2
-10
-3
-15
2
DMA
0
VCT
TTO
-2
JAM
BHS
HTI
LCA
BRB
GRD
-4
-4
KNA
-6
-6
10
40
70
100
130
-4
-20
JAM
BHS
BRB
ECCU
DOM
TTO
Public Debt, 2008 (percent of GDP)
19
Why did the crisis happen?

Market discipline and regulations failed to keep up
with innovation and leverage build up

Macroeconomic policies did not respond to increase
in systemic risk

Leadership needed at the international level to detect
and respond to risks
20
What can be done to foster the recovery?:
A consistent policy framework

Accommodative monetary policy and continued support for
banks to support credit and demand.

Repair and reform financial systems.

Medium-term fiscal consolidation plans, including to build
credibility and new room for policy maneuver.

Structural reforms and exchange rate flexibility to boost
domestic demand in key EM.

Employment promotion and protect the most vulnerable.
If recovery threatens to stall: (i) further monetary easing; (ii) in
countries with fiscal room, allowing automatic stabilizers to play
and postponing some consolidation.
21
Monetary policy needs to remain accommodative, but there
are limits to its effectiveness (as long rates are very low)
Change in Long-Term Bond Yield, 2010 1/
(basis points)
15
500
Change from March, basis points, RHS
12
400
August long-term interest rates, percent, LHS
9
300
6
200
3
100
0
0
GBR
USA
TWN
SWE
ESP
SVN
SVK
SGP
PRT
NOR
NZL
NLD
KOR
JPN
ITA
ISR
IRL
HKG
GRC
DEU
FRA
FIN
DNK
CZE
CAN
-200
BEL
-6
AUT
-100
AUS
-3
1/ AUS: Australia; AUT: Austria; BEL: Belgium; CAN: Canada; CZE: Czech Republic; DNK: Denmark; FIN: Finland; FRA: France; DEU: Germany; GRC: Greece; HKG:
Hong Kong SAR; ISL: Iceland; IRL: Ireland; ISR: Israel; ITA: Italy; JPN: Japan; KOR: Korea; NLD: Netherlands; NZL: New Zealand; NOR: Norway; PRT: Portugal;
SGP: Singapore; SVK: Slovak Republic; SVN: Slovenia; ESP: Spain; SWE: Sweden; TWN: Taiwan Province of China; GBR: United Kingdom; USA: United States.
22
Financial sector repair and reform
need to accelerate

Recapitalize/resolve banks

Repair markets for securitized assets

Re-establish market discipline

Implement regulatory reform with a broader and more
global view (broaden the regulatory perimeter and foster
cross-border coordination among regulators)
23
Medium-term fiscal plans are urgently needed
Projected Change in Cyclically Adjusted Primary Balances
(percent of potential GDP)
20
Change 2013-2011
Change 2011-2010
Change 2010-2009
Additional adjustment between 2013-2020 1/
15
10
5
0
Greece
Spain
Portugal
Ireland
United Kingdom
Japan 3/
Italy
France
United States 2/
Canada
Germany
-5
Source: FAD staff estimates.
1/ In percent of GDP; distance from blue bar reflects required additional fiscal adjustment relative to 2010-13; adjustment to be sustained between
2020–30 to reduce public debt to prudent levels.
2/ Structural primary balance.
3/ Excluding financial sector support recorded above the line.
24
Dealing with inflow surges: Exchange rate
flexibility and capital controls

Fiscal and monetary stimulus policies are leading to capital
inflow surges in emerging economies

Macro and prudential policies can help deal with the
downsides of inflow surges (appreciation and inflation)

Macro policy space (especially exchange rate) must be
exhausted before imposing capital controls

Capital controls and prudential measures should target
specific risks

Prudential measures when flows intermediated
through the regulated financial institutions

Capital controls when flows by-pass regulated
financial institutions
25
Foster employment and protect the most
vulnerable
ILO/IMF collaboration (Oslo Conference 9/2010)

The crisis will not be over until unemployment falls

Growth is essential for employment, but it is not enough

Job creation must be a priority

Specific policies are needed to protect the poor and the
vulnerable (social protection floor)

Programs to subsidize short-term work and on-the-job
training

Unemployment benefits

Job subsidies
26
Over the medium term, what are the main lessons
for policy makers on the macroeconomic level?

Monetary policy should respond to the buildup of
systemic risk (focus on macro-financial stability)

Fiscal policy should be put on a stronger footing in good
times (to open up fiscal space for countercyclical fiscal
stimulus in bad times)

While international capital flows are on the whole
beneficial, global imbalances have to be addressed
27
The world is recovering from the great recession,
but huge challenges remain
✓
Unemployment
✓
Fiscal sustainability
✓
Sources of growth
✓
Financial sector reform
✓
Capital flows to emerging markets
28
As the Caribbean recovers from the great recession,
it faces significant challenges going forward
✓
Promoting growth
✓
Fiscal sustainability
- Energy and infrastructure
- Human capital
- Competitiveness
- Diversification
- Reducing debt-to-GDP ratios
- Creating fiscal space to allow for
countercyclical policy
✓
✓
Financial sector
- Strengthening regulations, particularly for
nonbank FI
- Resolving CLICO
Climate change
29
Growth is projected to be lower than in the past
Caribbean: Real GDP Growth 1/
(annual percentage change)
5
5
3.8
4
4
3.1
3
3.2
3.2
3.2
2013
2014
2015
2.8
3
2.4
1.9
2
2
1
1
0
0
1990-99 avg.
2000-02 avg.
2003-08 avg.
2011
2012
Source: IMF WEO (October 2010).
1/ Caribbean countries include Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana,
Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
30
Medium-term fiscal plans are urgently needed
Caribbean: Projected Change in Cyclically Adjusted Primary Balances
(percent of potential GDP)
20
Change 2013-2012
15
Change 2011-2010
10
Change 2010-2009
5
0
-5
-10
Trinidad & Tobago
Suriname
St. Vincent & the
Grenadines
St. Lucia
St. Kitts & Nevis
Jamaica
Guyana
Grenada
Dominica
Belize
Barbados
Bahamas
Antigua & Barb.
-15
Source: WHD staff estimates.
31
Financial Sector

Strengthening the financial sector requires


Upgrading the legislative and supervisory framework for

Commercial banks

Nonbank financial institutions

Intensifying monitoring and on-site inspections, and more
frequent reporting

Consolidated supervision of conglomerates

Agreements and closer collaboration for cross-border
supervision
Urgent resolution of CLICO

A transparent resolution process

Minimize fiscal costs and contingent liabilities
32
Thank You