Transcript IMF

The Global Character of the
Economic and Financial Crisis:
Toward a New Financial Architecture
by
Tonny Lybek
IMF’s Resident Representative in Romania and Bulgaria
[email protected]
at
Overcoming The Crisis
Representation of The European Commission
& European Institute of Romania
Bucharest
November 19, 2009
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Agenda
Character of Global Crisis:
 I: World Economic Outlook
 II: Regional Economic Outlook
– From excessive credit growth to a credit crunch
Changes in the Financial Architecture:
 III: The role of the IMF
 IV: Romania as a case in point
 V: Conclusion
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I.1 Character of The Global Crisis
 Deepest global recession since the 1930’s:
 In 2009, world growth is expected to decline
(1.1 percent) for the first time in 60 years!
 International trade declining
 The phases:
 Sub-prime in the USA
 -> Financial fragility increases (from local to global)
 Sep. 15, 2008: Lehman’s Bankruptcy
 -> Global downturn
 March 2009: Downturn looses speed
 -> Uneven recovery
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I.2 How Long Will It Last?
 Financial shocks:
 Global integration larger than most realized!
 Financial shocks typically lasts longer!
 No obvious locomotive:
 Unemployment is lagging!
 Non-performing loans (NPLs) are lagging!
 Positive signs, but no time for complacency!
 Principles for exit (G20 in November 6–7):
http://www.imf.org/external/np/g20/110709.htm
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I.3 World Economic Outlook
Real GDP and World Trade, Annual Change in Percent
2007
2008
Time of projection:
World output
Advanced economies
United States
Euro area
Germany
France
Italy
Spain
Japan
United Kingdom
European Union
World trade volume
Imports of advanced economies
Imports of emerg. & dev. countries
Exports of advanced economies
Exports of emerg. & dev. countries
2009
April
June
Sep
2010
April
June
Sep
5.2
3.0
-1.3
-1.4
-1.1
1.9
2.5
3.1
2.7
2.1
2.7
2.5
2.3
1.6
3.6
2.3
2.6
3.1
0.6
0.4
0.7
1.2
0.3
-1.0
0.9
-0.7
0.7
1.0
-3.8
-2.8
-4.2
-5.6
-3.0
-4.4
-3.0
-6.2
-4.1
-4.0
-3.8
-2.6
-4.8
-6.2
-3.0
-5.1
-4.0
-6.0
-3.8
-4.6
-3.4
-2.7
-4.2
-5.3
-2.4
-5.1
-3.8
-5.4
-4.4
-4.2
0.0
0.0
-0.4
-1.0
0.4
-0.4
-0.7
0.5
-0.4
-0.3
0.6
0.8
-0.3
-0.6
0.5
-0.1
-0.8
1.7
0.1
-0.1
1.3
1.5
0.3
0.3
0.9
0.2
-0.7
1.7
0.9
0.5
7.3
4.7
13.8
6.3
9.8
3.0
0.5
9.4
1.9
4.6
-11.0
-12.1
-8.8
-13.5
-6.4
-12.2 -11.9
-13.5 -13.7
-9.6 -9.5
-14.9 -13.6
-6.5 -7.2
0.6
0.4
0.6
0.5
1.2
1.0
0.6
0.8
1.3
1.4
2.5
1.2
4.6
2.0
3.6
Source: Table 1.1 in World Economic Outlook, April 2009; Table 1 in World Economic Outlook Update , July 2009,
IMF; and Table 1.1 in World Economic Outlook, October 2009 , IMF.
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II.1 Character of The Regional Crisis
 The Good Times 2003–07—Catching-up
 Vulnerabilities were building-up!
 Crisis came late to the region:
 The five stages: Denial ->
Resentment ->
Bargaining ->
Depression ->
Acceptance!
 Initial denial made it difficult to take early action!
 Impact of the global crisis
 Regional Economic Outlook
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II.2 The Good Times 2003–07: Catching-up
 Central and Eastern Europe (CEE) real GDP growth
averaged 6%:
 Strong global GDP growth boosted exports of CEE.
 Capital inflows boosted domestic demand:
 Liberalized, integrated, preparing for EU accession.
 Western Banks expanded aggressively in Emerging Europe.
 Fiscal deficits reduced and public debt ratios declined:
 Except in Hungary (public debt) and Romania (fiscal deficit)
 Private sector imbalances growing rapidly!
 Public finances looked much better than they were!
 Convergence process not fully appreciated!
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II.3 Vulnerabilities building-up:
 Current account deficits widened to
unsustainable levels!
 Exposures to Western European banks
increased!
 Credit growth was very rapid
=> asset price booms!
 Much of the lending was in foreign currency
 Private sector external debt increased
quickly to very high levels!
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II.4 Current Account Deficits Increased
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II.5 Increasing Exposure to Western Banks
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II.6 Much of The Lending in FX
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II.7 Impact of The Global Crisis
 Shock I: Lower external demand
 Shock II: Slowdown in capital inflows:
 Foreign direct investment (FDI)
 Funding of—mainly foreign-owned—banks!
 Direct borrowing by non-financial companies
 Slow-down in domestic demand:




Delaying investments, particularly construction
Uncertainty about employment
Slower wage growth and lower remittances
Wealth effects (asset prices)
 Some already ripe for a home-grown crisis:
 Cushions differ among countries
 IMF has tried to stress differences in the region!
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II.8 Vulnerabilities and Severity of
Recessions Have Varied
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II.9 Regional Economic Outlook
Real GDP, Annual Change in Percent
2007
2008
Time of projection
Baltics
Estonia
Latvia
Lithuania
2009
April June
Sep Nov
2010
April June Sep Nov
7.2
10.0
8.9
-3.6
-4.6
3.0
-10.0
-12.0
-10.0
… -14.0
… -18.0
… -18.5
…
…
…
-1.0
-2.0
-3.0
… -2.6
… -4.0
… -4.0
…
…
…
Central Europe
Hungary
Poland
1.2
6.8
0.6
4.9
-3.3
-0.7
… -6.7
… 1.0
…
…
-0.4
1.3
… -0.9
… 2.2
…
…
Southeastern Europe
Bulgaria
Croatia
Romania
6.2
5.5
6.2
6.0
2.4
7.1
-3.5
-3.5
-4.1
-7.0 -6.5 …
… -5.2 …
-8.0 -8.5 -7.8
-1.0
0.3
0.0
-2.5 -2.5
… 0.4
1.7 0.5
…
…
0.5
Source: Table 2.4 in World Economic Outlook, April 2009; Table 1 in World Economic Outlook Update ,
July 2009, IMF; and Table A4 in World Economic Outlook, October 2009, IMF.
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III.1 Coordinated Global Measures
 Avoid the mistakes of the 1930s:
 Avoid a liquidity crisis becoming a solvency crisis
 Avoid trade restrictions and capital controls
 Avoid excessive competing depreciations
 Coordinated policy actions (G20 statements):
 Central banks provide ample liquidity
 Governments allow stimulus subject to fiscal space
 Global coordination:
 The changing role of the IMF
 World Bank, EBRD, EIB, etc.
 The European Union (EU)
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III.2 The Role of The IMF
 Mitigating the impact of the global crisis:
 Reform of IMF facilities:
 Adjust set of facilities:
– Introduced Flexible Credit Line (FCL)
– Enhanced Stand-By Arrangement (SBA)
– Facilitated exceptional access and frontloading
 Streamlining conditionality:
– Re-focus on macroeconomic stability
– Reduce detailed structural conditionality
 Increase access to funding ($250 ->$750 bill)
 Increase SDR allocation
 Further encourage policy coordination:
 Surveillance (macroeconomic policies)
 Financial sector regulation (role of FSAP)
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III.3 IMF Assistance Suddenly Needed
Access levels and growth declines in Fund arrangements
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ARG ARG
RUS
TUR
5
COL
TUR
Percent change in real GDP 1/
IDN
0
PHL
BRA
BRA MEX
GTM
BRA
BLR COL
IRQ
UKR
-5
LKA
PAK
SLV
ARG
CRI
BIH
GEO
SRB
TUR
KOR
URY
HUN
-10
THA
IDN
ISL
IDN
-15
POL
MNG
MEX
SYC
ROM
UKR
ARG
ARM
-20
LVA
-25
-30
1997
1999
2001
2003
2005
2007
2009
Sources: WEO and staff calculations.
1/ Maximum cumulative decline in three years from program inception; projected changes for current programs.
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III.4 IMF Lending Activities
IMF Lending Arrangements, October 31, 2009
Member
Belarus
Bosnia and Herzegovina
Hungary
Iceland
Latvia
Romania
Serbia
Ukraine
Poland
Total Europe
Total
Date of
Expiration Total Amount Undrawn Outstanding
Arrangement
In billions of SDR
SBA
SBA
SBA
SBA
SBA
SBA
SBA
SBA
FCL
12-Jan-09 11-Apr-10
8-Jul-09 30-Jun-10
6-Nov-08
5-Apr-10
19-Nov-08 31-May-11
23-Dec-08 22-Mar-11
4-May-09 3-May-11
16-Jan-09 15-Apr-11
5-Nov-08 4-Nov-10
6-May-09 5-May-10
o/w Europe in percent
Source: International Monetary Fund.
Note: 1 SDR = 1.08804 € on October 31, 2009.
2.3
1.0
10.5
1.4
1.5
11.4
2.6
11.0
13.7
55.5
108.8
0.9
0.8
2.9
0.7
0.8
5.4
1.9
4.0
13.7
31.1
78.6
1.4
0.2
7.6
0.7
0.7
6.1
0.7
7.0
0.0
24.4
30.9
51.0
39.6
79.0
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IV.1 Romania: A Case in Point
 Global crisis made it increasingly
difficult to secure external financing:
 Large short-term private debt
 Large fiscal imbalances even in good
years, make financing challenging
during a recession
=> Emerging credibility problem!
=> In need of a “safety belt”!!
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IV.2 Romania’s Package
 Joint package supporting Romania’s program!
 Size of the “safety belt” (€20 billion over 2 years):
 IMF: May 4; 24-month Stand-By Arrangement with exceptional access
€12.95 billion (1110.77% of quota). Interest rate about 3½% and
repayment over 3–5 years.
 EU*: May 5; ECOFIN Council approved the framework for a €5 billion
loan, a maximum of five installments over 24 months (on top of preand post-accession funds and the advance payment of structural
funds in 2009). Interest rate is libor + spread and an “average maturity
of maximum 7 years”.
 World Bank*: 2009–10, 3 DPLs of total €1 billion. Interest rate will
depend on the maturity, currency, and if fixed or floating rate.
 EBRD and other multilateral IFIs (EIB): various projects, about €1
billion.
*Also budget support
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IV.2 Romania’s Economic Program
 Foreign banks committed to maintain exposure:
 European Bank Coordination Initiative: exposure
CAR of 10%
 Government addresses fiscal imbalances:
 Fiscal consolidation: ensure sustainability!
 Improve fiscal governance: ensure predictability!
 NBR continues to maintain sound banking system:
 Ensure prompt and early action
 Price stability remains primary objective of
monetary policy
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IV.3 Ensure Fiscal Sustainability
 Budget deficits: March adjustment
 2009
 2010
 2011




1.1% of GDP
August adjustment 0.8 % of GDP
March
August
-4.6%
-7.3%
-3⅔%
-5.9%
better than-3%
-4.3%
Public salaries
Vulnerable groups
Arrears of general government
Government guarantees
 Balance following factors:
 Back on a sustainable path
 Realistic financing
 Avoid excessive cuts exacerbating the recession
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IV.4 Ensure Fiscal Predictability
 Tax administration
 Restructuring of public sector
 *Public compensation reform (“unitary public pay law”):




Simplified pay scale, reduce reliance on bonuses
More transparent
Equity
Save resources
 Better monitoring and control of public enterprises
 *Fiscal responsibility act:
 Multi-year budgets
 Independent fiscal council
 Local governments and self-financed units
 *Pension reform:




Pensions related to contributions
Broaden coverage
Index to inflation instead of wages
Increase gradually the retirement age
* New legislation
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IV.5 Market Reactions
1400
EURNM CDS Spreads 5-year
(In basis points)
September 15, 2008
Lehmann Brothers
files for bankruptcy
1200
March 25, 2009
Agreement at staff
level on Romania's
Economic Program
April 2, 2009
G20 Statement
in London
Bulgaria
Czech Republic
Estonia
Latvia
Lithuania
Hungary
Poland
Romania
Slovak Republic
1000
800
October 1, 2009
Romania's coalition
government splits
600
400
200
0
Apr-08
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Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
V.1 Conclusion: IMF
 Global financial crisis is deep!
 Financial integration is significant!
 The IMF is mitigating the crisis by:
 Intensified coordination:
 member countries, other IFIs, EU, and banks
 Providing financing to smooth the adjustment:
– Should not be an excuse to delay structural reforms!
 Functioning as an external anchor provided
authorities are committed!
 Further encourage global policy coordination
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V.2 Lessons: The Jury Is Still Out!
 Unsustainable imbalances must be addressed:
 No alternative to sound macroeconomic policies:
 Sustainable fiscal policies!
 Price stability with an eye on asset price inflation!
 G20 (IMF, WB, etc.): Improve global surveillance!
 Financial intermediation is a catalist:
 Legal and prudential framework must ensure:
 Sound incentives, and
 Adequate capital buffers!
 G20 (FSB & IMF), and EU: Revisit regulatory and
supervisory framework!
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Thank
you
very
much
for
your
attention
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Principles for Policy Exits

1. The timing of exits should depend on the state of the economy and the financial system,
and should err on the side of further supporting demand and financial repair.

2. With some exceptions, fiscal consolidation should be a top policy priority. Monetary
policy can adjust more flexibly when normalization is needed.

3. Fiscal exit strategies should be transparent, comprehensive, and communicated clearly
now, with the goal of lowering public debt to prudent levels within a clearly-specified
timeframe.

4. Stronger primary balances should be the key driving force of fiscal adjustment,
beginning with actions to ensure that crisis-related fiscal stimulus measures remain
temporary.

5. Unconventional monetary policy does not necessarily have to be unwound before
conventional monetary policy is tightened.

6. Economic conditions, the stability of financial markets, and market-based mechanisms
should determine when and how financial policy support is removed.

7. Making exit policies consistent will improve outcomes for all countries. Coordination
does not necessarily imply synchronization, but lack of policy coordination could create
adverse spillovers."

Source: http://www.imf.org/external/np/g20/110709.htm
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