Transcript Greek crisis

ECONOMIC AND FINANCIAL CRISES
Lecture 4
LIUC 2010
Recent crises
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1997 currency/financial crisis in East Asia
1998 financial crisis in Russia
1999 Brazil
2001 Argentina, Turkey
2007- Subprime crisis
2010 Greek crisis
The 2007 subprime crisis
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Unlike previous crises, the subprime crisis
originated in mature economies
 Rapid pace of growth in housing prices, fuelled
by:
 cheap mortgages;
 banking deregulation (financial derivatives that
allowed mortgages to be packaged and re-sold (and resold again);
 households beginning to use real estate as a speculative
asset
A global crisis
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From the US mortgage sector the crisis spilled over to
asset-backed securities all over the world.
Financial crisis entered a more severe phase after the
Lehman collapse in Sept 2008, with risk premiums
rising sharply and affecting corporate borrowing.
The downturn in asset markets snowballed rapidly across
the world, and Europe was one of the most affected, due
to the heavy exposure of a number of EU countries to the
US subprime problem.
Emerging markets, initially sheltered from the financial
turbulence due to limited exposure to US subprime loans,
were hit in autumn 2008, as risk aversion spiked.
EU response to the crisis
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Came after September 08
– Banking support through: debt
guarantees, recapitalization, liquidity
support, treatment of impaired assets
– A strong expansionary stance
• Monetary policy: lower cost of borrowing,
provision of liquidity, lower collateral
standards. In terms of the euro area GDP
the ECB balance sheet rose from 13 to 21%
from 97 to 09
EU response to the crisis
– A strong expansionary stance
• Fiscal policy: European Economic Recovery
Program (endorsed by the Council in Dec.
08). 3 principles: country specific packages
according to the available fiscal room,
measures targeted, timely, temporary The
overall fiscal stimulus, including the effects of
automatic stabilisers, amounts to 5% of GDP in the
EU.
Greek crisis: the facts
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Following the Greek elections in Oct 2009, it was realised
that the fiscal and public debt positions for 2008 and 2009
were far worse than reported by the previous
government.
 The deficit jumped to an estimated 13.6% of GDP while
the public debt rose to over 115% of GDP in 2009.
 After downgrades of government bonds by rating
agencies, investors started backing out of Greek bonds,
driving up yields.
 Banking system affected. Impaired loans are rising while
borrowing costs in the interbank and wholesale markets
have increased.
International response to Greece
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On 2 May 2010 the Eurogroup formally launched a
financial assistance mechanism, conditional on the
implementation of an adjustment programme and on an
assessment by the EC and the ECB of the risks to financial
stability in the euro area.
The adjustment programme agreed was negotiated, in
liaison with the ECB and the IMF. The overall financing
package amounts to €110 billion over three years.
The first review of the programme in Summer 2010
concluded that Greece has managed impressive
budgetary consolidation during the first half of 2010. It
has also achieved progress in major structural reforms
which will help to transform the economy. Some of these
reforms have been undertaken ahead of schedule.
Greece: remaining challenges and next steps
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Despite the significant progress made, major challenges
and risks remain. There is a need to :
 Safeguard adequate liquidity and financial stability
of the banking sector, also following up on the results
of the July 2010 CEBS stress tests.
 Avoid slippages in budgetary execution in the
second half of the year.
 Press ahead the structural reform agenda
Next steps: The next tranche of the loan agreement has
been disbursed in September. The euro-area share was
€6.5 billion; the IMF added €2.5 billion for a total of €9
billion.
Euro area: the worst has been avoided, but new
challenges must be faced
"The euro area's governance and coordination of
economic policies must be improved. This will
involve both deepening and broadening economic
surveillance arrangements to guide fiscal policy
over the cycle and in the long term and, at the
same time, address divergences in growth,
inflation and competitiveness."
(Commission Communication, 7 May 2008)
Need for reforms
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EU needs to develop a crisis policy
framework along 3 lines:
 Crisis prevention
 Crisis control and mitigation
 Crisis resolution
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A better governance system is necessary for
the future.
Some reforms have already been
implemented, others are still under
discussion.
What has been already done
 Reinforcing the preventive dimension of budgetary
surveillance: introduction of the "European Semester"
(from Jan 2011) to reinforce ex-ante coordination when
Member States prepare their national budgets and national
reform programs. Will align the processes under the SGP
and the Broad Economic Policy Guidelines (BEPGs).
 The European Financial Stability Facility (EFSF) has
become operational in Aug 2010. Set up by the 16 euro
countries to provide financing to Member States in financial
difficulties. Will issue bonds guaranteed by euro area
members for up to € 440 billion for on-lending, subject to
conditions to be negotiated with the European Commission
in liaison with the ECB and IMF and to be approved by the
Eurogroup.
What is under discussion
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In the next months:
 Commission’s proposal for strengthening
the Stability and Growth Pact (SGP)
 Commission’s proposal for preventing
and correcting macroeconomic
imbalances
Annex 1 – Greece first review of the programme
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All budgetary performance criteria for June 2010 have been met
All fiscal measures foreseen to be taken in 2010 have been adopted - In line with the
requirements set in the MoU on Specific Economic Policy Conditionality, Parliament has
adopted in May measures that generate savings for a total amount of 2.5 percent of GDP
in 2010, plus carryovers of 1.1 percent of GDP for 2011. That brings total budgetary
measures in four successive packages to around 8 percent of GDP in 2010.
Significant progress has been achieved in structural fiscal reforms: Key reforms
include the preparation of the new organic budget law, measures against tax evasion and
steps forward in setting up a single payment authority for public wages. Significant
progress has also been made in strengthening tax administration and in reforming public
administration. Preparations are less advanced in the implementation of a system to
monitor and control expenditure commitments.
Major steps forward have also been made in the broader structural reform agenda.
Business environment reforms, measures to accelerate absorption of structural and
cohesion funds and horizontal legislation to implement the services directive are on track;
major labour market and pension reform laws were adopted ahead of schedule, though
they may require some further actions. The privatisation and restructuring of state-owned
enterprises needs to be sped up and in many cases be more ambitious.
The Financial Stability Fund has been established and the Bank of Greece is committed
to strengthen banking supervision.
Efforts to improve the collection and processing of data which is essential for budgetary
control need to be accelerated.