The Eurozone Debt Crisis 2010
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Transcript The Eurozone Debt Crisis 2010
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Digression:
The Eurozone Debt Crisis 2010
Prof. Dr. Rainer Maurer
Maure
-1-
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Digression:
The Eurozone Debt Crisis 2010
Prof. Dr. Rainer Maure
-2-
The Eurozone Debt Crisis 2010
➤ The Return of the Interest Rate Spreads:
After the foundation of the European Monetary Union (EMU)
interest rates spreads between the member states nearly
disappeared.
■
By the end of the year 2008, interest rate spreads reappeared.
■
For some countries interest rate spreads have become large:
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■
Prof. Dr. Rainer Maure
-3-
The Eurozone Debt Crisis 2010
10%
Spain
Interest Rate Spread
Interest Rate
9%
8%
7%
6%
5%
4%
2,0%
3%
2%
1%
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0%
Jan. 99
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
10Y Government Bond Interest Rate Germany (left scale)
Source: Eurostat, Central Bank of Spain, Own Calculations
Prof. Dr. Rainer Maure
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
Interest Spread compared to Germany (left scale)
-4-
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The Eurozone Debt Crisis 2010
Ireland
Interest Rate Spread
10% Interest Rate
9%
8%
7%
6%
5%
4%
2,5%
3%
2%
1%
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0%
Jan. 99
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
10Y Government Bond Interest Rate Germany (left scale)
Prof. Dr. Rainer Maure
Source: Eurostat, Own Calculations
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
Interest Spread compared to Germany (left scale)
-5-
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The Eurozone Debt Crisis 2010
10%
Portugal
Interest Rate Spread
Interest Rate
9%
8%
7%
6%
5%
3,4%
4%
3%
2%
1%
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0%
Jan. 99
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
10Y Government Bond Interest Rate Germany (left scale)
Source: Eurostat, Central Bank of Portugal, Own Calculations
Prof. Dr. Rainer Maure
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
Interest Spread compared to Germany (left scale)
-6-
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The Eurozone Debt Crisis 2010
10%
Greece
Interest Rate Spread
Interest Rate
9%
8%
7%
6,9%
6%
5%
4%
3%
2%
© RAINER MAURER, Pforzheim
1%
0%
Jan. 99
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
10Y Government Bond Interest Rate Germany (left scale)
Source: Eurostat, Own Calculations
Prof. Dr. Rainer Maure
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
Interest Spread compared to Germany (left scale)
-7-
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The Eurozone Debt Crisis 2010
➤ What caused the crisis?
■
Increasing public and private debt positions
....have casted doubt on the ability of governments and banks
safeguarded by governments to pay back debt.
■
Investors fear of a default of governments on their debt and
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....demand therefore a higher risk premiums.
Prof. Dr. Rainer Maure
-8-
The Eurozone Debt Crisis 2010
10%
Interest Rate
Spain
Interest Rate Spread and Debt-to-GDP Ratios
Debt-to-GDP
110%
9%
100%
8%
90%
80%
7%
70%
6%
60%
5%
50%
4%
40%
3%
30%
20%
1%
10%
0%
Jan. 99
0%
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2%
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
10Y Government Bond Interest Rate Germany (left scale)
Interest Spread compared to Germany (left scale)
Total Country Int. Net Debt Position GDP Ratio
Total Government Debt GDP-to-Ratio
Source: Eurostat, Central Bank of Spain, Own Calculations
Prof. Dr. Rainer Maure
-9-
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The Eurozone Debt Crisis 2010
10%
Interest Rate
Ireland
Interest Rate Spread and Debt-to-GDP Ratios
Debt-to-GDP
80%
70%
9%
60%
8%
50%
7%
40%
30%
6%
20%
5%
10%
0%
4%
-10%
3%
-20%
2%
-30%
-40%
1%
-50%
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0%
Jan. 99
-60%
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
10Y Government Bond Interest Rate Germany (left scale)
Interest Spread compared to Germany (left scale)
Total Country Int. Net Debt Position GDP Ratio
Total Government Debt GDP-to-Ratio
Prof. Dr. Rainer Maure
Source: Eurostat, Own Calculations
- 10 -
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The Eurozone Debt Crisis 2010
10%
Interest Rate
Portugal
Interest Rate Spread and Debt-to-GDP Ratios
Debt-to-GDP
110%
9%
100%
8%
90%
80%
7%
70%
6%
60%
5%
50%
4%
40%
3%
30%
20%
1%
10%
0%
Jan. 99
0%
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2%
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
10Y Government Bond Interest Rate Germany (left scale)
Interest Spread compared to Germany (left scale)
Total Country Int. Net Debt Position GDP Ratio
Total Government Debt GDP-to-Ratio
Source: Eurostat, Central Bank of Portugal, Own Calculations
Prof. Dr. Rainer Maure
- 11 -
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The Eurozone Debt Crisis 2010
10%
Interest Rate
Greece
Interest Rate Spread and Debt-to-GDP Ratios
Debt-to-GDP
130%
120%
9%
110%
8%
100%
7%
90%
6%
80%
70%
5%
60%
4%
50%
3%
40%
30%
2%
20%
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1%
10%
0%
0%
Jan. 99
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
10Y Government Bond Interest Rate Germany (left scale)
Interest Spread compared to Germany (left scale)
Total Country Int. Net Debt Position GDP Ratio
Total Government Debt GDP-to-Ratio
Prof. Dr. Rainer
Maure
Source:
Eurostat,
Own Calculations
- 12 -
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The Eurozone Debt Crisis 2010
➤ The situation is even worse than these figures suggest!
■ The change of a country's total debt position is the negative
current account surplus.
■
We can calculate the current account surplus which is
necessary to stabilize the current international debt-to-GDP
ratio with the following formula (for a derivation see the
digression):
Interest
Rate
Primary Current
Account Balance
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EX-IM-i*D
B
Y
i
GDP
Growth
Y
dY
dt
International
Net Debt
Position of
the Country
D
Y
GDP
Prof. Dr. Rainer Maure
- 13 -
The Eurozone Debt Crisis 2010
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➤ Applying this formula to the data of the countries shows that
their actual account surplus is far away from the surplus
necessary to keep their debt-to-GDP ratio constant:
Prof. Dr. Rainer Maure
- 18 -
The Eurozone Debt Crisis 2010
Spain
15%
Current Account Surplus Gap
Percent of GDP
15%
Current account surplus necessary to stabilize the
International Debt-to-GDP ratio is 7,5% of GDP.
10%
10%
5%
5%
0%
0%
Jan. 99
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
-5%
-5%
Acutal current account surplus - 5,5% of GDP!
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-10%
-15%
Prof. Dr. Rainer Maure
-10%
=> Current account surplus gap = 13 % of GDP!
-15%
Constant Intern. Net Debt-to-GDP Ratio Current Account Surplus (right scale)
Actual Current Account Surplus
Source: Eurostat, Own Calculations
- 19 -
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The Eurozone Debt Crisis 2010
Portugal
15%
Current Account Surplus Gap
Percent of GDP
15%
10%
10%
5%
5%
0%
0%
Jan. 99
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
-5%
-5%
Current account surplus gap = 18,5 % of GDP!
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-10%
-10%
-15%
Prof. Dr. Rainer Maure
-15%
Constant International Net Debt-to-GDP Ratio Current Account Surplus
Actual Current Account Surplus
Source: Eurostat, Own Calculations
- 20 -
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The Eurozone Debt Crisis 2010
Ireland
15%
Current Account Surplus Gap
Percent of GDP
15%
10%
10%
Current account surplus gap = 15 % of GDP!
5%
5%
0%
Jan. 99
0%
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
-5%
-5%
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-10%
-10%
-15%
Prof. Dr. Rainer Maure
-15%
Constant International Net Debt-to-GDP Ratio Current Account Surplus
Actual Current Account Surplus
Source: Eurostat, Own Calculations
- 21 -
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The Eurozone Debt Crisis 2010
Greece
15%
Current Account Surplus Gap
Percent of GDP
15%
10%
10%
5%
5%
0%
0%
Jan. 99
Jan. 00
Jan. 01
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-5%
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
-5%
Current account surplus gap = 25 % of GDP!
-10%
-10%
-15%
-15%
Prof. Dr. Rainer Maure
Constant International Net Debt-to-GDP Ratio Current Account Surplus
Actual Current Account Surplus
Source: Eurostat, Own Calculations
- 22 -
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The Eurozone Debt Crisis 2010
Interest Rates (Average: Sept. 2009 - May 2010) and Constant International Debt
Position-to-GDP Ratio Primary Current Account Gap (Average: Jan. 2009 - Aug. 2009)
6,0%
Nominal Interest
Rates 10Y Bonds
Correlation Coefficient: 70,1%
Greece
The larger the
current account
gap, the higher the
risk premium!
5,5%
5,0%
Ireland
Cyprus
4,5%
Malta
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Italy
Belgium
Luxembourg
Austria
Finland3,5%
Netherlands
Portugal
Slovakia
4,0%
Slovenia
Spain
United Kingdom
France
Germany
Constant IDP-to-GDP Ratio Current Account Surplus Gap
3,0%
-15%
-10%
Source: Eurostat, Own Calculations
Prof. Dr. Rainer Maure
-5%
0%
5%
10%
15%
- 20%
23 -
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The Eurozone Debt Crisis 2010
➤ The situation is precarious!
➤ How to get out of this???
➤ To help countries like Greece, Portugal, Spain and Ireland
their " Current Account Gap" must be reduced:
Bt
Yt
it
dYt
dt
Yt
Dt
Bt
Yt
Yt
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B
Y
o
Prof. Dr. Rainer Maure
Depressed
- 25 EMU
The Eurozone Debt Crisis 2010
➤ How to get out of this???
➤ Special problem of indebted countries, which are member
states of a monetary union:
1. They have no own currency they can depreciate to improve
their current account:
e$€ ↓ => P€ e$€ ↓ < P$
=>
( EX ↑ – IM ↓ ) ↑
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Reduction of current
account gap!
2. They have no own currency to inflate away debt!
Prof. Dr. Rainer Maure
- 26 -
Digression: How to "inflate away" government debt ???
The present value (=PVt,T=market value) of government debt
with a face value of 1€ is given by the formula:
PVt ,T
The Dark
Corners of
Fiscal Policy
zT
1
1
1
T
T
(
1
i
)
i
(
1
i
)
t ,T
t ,T
t ,T
If the market interest rate it,T=2% is equal to fixed interest rate of government
debt zt,T =2%, the market value is equal to the face value = 1€:
PVt ,T
2% T
1
1
1
T
T
(1 2% t ,T )
(1 2% t ,T ) 2% t ,T
1
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If an increase of inflation by 3% increases the nominal market interest rate
(=real interest rate + inflation rate) by 3% and the average maturity of
government debt is T=10 years, the market value of government debt falls by
nearly one quarter:
=>
PVt ,T
Prof. Dr. Rainer Maurer
Maure
2% T
1
1
1
10
10
(1 5% t ,T )
(1 5% t ,T ) 5% t ,T
Create a
little bit
0,77
inflation and
buy back
- 27 -
The Eurozone Debt Crisis 2010
➤ How to get out of this???
➤ Special problem of member states of a monetary union:
3. Leaving the monetary union will cause the countries debt
position to explode !!!
◆
If Greece would leave the eurozone:
Its new currency (the Neodrachmae) will depreciate against
the Euro: e€Neodramae ↓
↓
Prof. Dr. Rainer Maure
The Greek debt measured in Neodramae will grow in case of
a depreciation:
DNeodramae
= ( D€ / e€Neodramae↓ )
↓
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However, Greek government bonds (as well as private debt)
are denominated in Euro D€ !
- 28 -
The Eurozone Debt Crisis 2010
➤ How has it come to this?
■
The EMU is a monetary union across countries which have
asynchronous business cycles:
GDP Gaps of ECU Member States and the USA
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(Trend Deviation of GDP in Percent of Trend measured by Hodrick-Prescott-Filter)
0,020
0,015
0,010
0,005
2009Q03
2009Q01
2008Q03
2008Q01
2007Q03
2007Q01
2006Q03
2006Q01
2005Q03
2005Q01
2004Q03
2004Q01
2003Q03
2003Q01
2002Q03
2002Q01
-0,005
-0,010
-0,015
GDP Gap = Actual GDP minus trend GDP in % of trend
GDP
-0,020
Germany (left scale)
USA (left scale)
Standard Deviation without Cyprus, Malta, Slovenia, Slovakia, USA (right scale)
Source: Eurostat, Own
Prof. Dr. Rainer Maure
2001Q03
2001Q01
2000Q03
0,000
2000Q01
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
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- 29 -
The Eurozone Debt Crisis 2010
➤ How has it come to this?
■
As a result, inflation rates across the EMU member state are
typically quite different:
GDP Price Deflator Relative to Germany
Indices Relative to Germany (1999 = 100%)
130%
125%
120%
115%
110%
Euro area (16 countries)
Source: EU Commission, AMECO, Own Calculations
Prof. Dr. Rainer Maure
Ireland
Greece
Spain
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
100%
1999
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105%
Portugal
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- 30 -
The Eurozone Debt Crisis 2010
➤ How has it come to this?
■
The European Central Bank can set only one main refinancing
rate.
■
Therefore, after the start of the EMU, nominal interest rates
across the eurozone converged.
■
However, convergence of nominal interest rate and different
country-specific interest rates causes a divergence of real
interest rates!
Real Interest Nominal Interest Inflation
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r
i
=> Countries with a high inflation rate have low real interest rates!
Prof. Dr. Rainer Maure
Countries with a low inflation rate have high real interest rates!
- 31 -
The Eurozone Debt Crisis 2010
➤ How has it come to this?
■
Convergence of nominal interest rate & divergence of real
interest rates:
Variance Coefficients across the 12 EMU Founding Member States
1,5%
1,3%
1,1%
0,9%
0,7%
0,5%
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0,3%
Prof. Dr. Rainer Maure
0,1%
Jan. 97 Jan. 98 Jan. 99 Jan. 00 Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 10
-0,1%
Source: Eurostat, Own Calculations
Nominal Interest Rates for 10-Year Government Bonds
Inflation Rates (HCPI)
Real Interest Rates for 10-Year Government Bonds
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- 32 -
The Eurozone Debt Crisis 2010
➤ How has it come to this?
■
Real interest rates compared to Germany:
Real Interest Rates for 10 Years Government Bonds (based on BIP-Deflator)
9,0%
8,0%
7,0%
6,0%
5,0%
4,0%
3,0%
2,0%
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1,0%
0,0%
Jan. 97 Jan. 98 Jan. 99 Jan. 00 Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 10
-1,0%
-2,0%
-3,0%
-4,0%
Germany
Prof. Dr. Rainer Maure
Source: Eurostat, Own Calculations
Spain
Greece
Ireland
Portugal
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- 33 -
The Eurozone Debt Crisis 2010
➤ How has it come to this?
■
Real interest rates and net international debt position:
December 2009 Accumulated Net Debt Position in Percent of GDP
and Average Real Interest Rate from Januar 1999 to December 2009
120%
Net Debt Position in % of GDP
in % of GDP
100%
Portugal
Spain
Greece
80%
Ireland
60%
40%
Italy
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20%
0%
1,3%
France
Austria
Finland
1,5%
-20%
1,7%
1,9%
2,1%
2,3%
2,5%
Netherlands
Belgium
2,7%
Real Interest Rate
Germany
-40%
Prof. Dr. Rainer MaureQuelle:
Eurostat, Eigene Berechnungen
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- 34 -
The Eurozone Debt Crisis 2010
➤ How has it come to this?
■
Inflation rates and net international debt position:
December 2009 Accumulated Net Debt Position in Percent of GDP
and Average HCPI Price Index from Januar 1999 to December 2009
120%
Net Debt Position in % of GDP
in % of GDP
100%
Portugal
Spain
Greece
80%
Ireland
60%
40%
Italy
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20%
0%
1,4%
France
Finland
Austria
1,6%
1,8%
Inflation Rate
2,0%
2,2%
2,4%
2,6%
2,8%
3,0%
3,2%
Netherlands
-20%
Germany
Belgium
-40%
Prof. Dr. Rainer MaureQuelle:
Eurostat, Eigene Berechnungen
© www.rainer-maurer.com
- 35 -
The integrated EMU capital market is in equilibrium, while
The
Eurozone
Debt
Crisis
2010
there is
a disequilibrium
in single
countries!
➤ How has it come to this?
■
Consequently, high inflation countries experienced on average
lower real interest rates than low inflation countries:
r
r
S(Y)
S(Y)
Excess Supply
rL *
r*
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Excess Demand
Prof. Dr. Rainer Maure
rH*
Low inflation country:
rL*= i*- πL
I(Y)
S, I
I(Y)
High inflation country:
S, I
rH*= i*- πH
- 36 -
The Eurozone Debt Crisis 2010
➤ How has it come to this?
■ Countries with high inflation rates built up a net international
■
debt position.
Countries with low inflation rates built up a net international
wealth position.
International Net Debt Position of Eurozone Debtor and Creditor Countries
1500
Bn. Euro
1000
500
0
Jan. 98
Jan. 99
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
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-500
-1000
-1500
Sum of Net International Debt Position of Spain, Greece, Ireland, Portugal
Sum of Net International Debt Position of Germany, Belgium, Luxembourg, Netherlands
Prof. Dr. Rainer Maure
Source: Eurostat, Own Calculations
© www.rainer-maurer.com
- 37 -
4.2. Financial Market Crises
4.2.5. The Eurozone Debt Crisis 2010
➤ How has it come to this?
Consequently, the eurozone debt crisis is not by chance!
■
It is caused by a design faulty of the EMU!
■
What can be done to built a more stable EMU?
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■
Prof. Dr. Rainer Maure
- 38 -