Transcript European Economic Perspectives: Banking on the consumer

Real Estate Investment and Development
CEE • SEE • Turkey
New Europe
GRI
New Europe GRI 2008, Bucharest, 24-25 November
CREDIT CRUNCH - BETTER OFF IN EASTERN
EUROPE?
Stephane Deo
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their investment decision.
ab
SECTION 1:
What happened
ab
Liquidity in the financial system ballooned
13
12
% YoY
11
10
9
8
7
6
5
4
3
2000
2001
2002
2003
Other
ab
2004
2005
2006
2007
Contribution from financial sector
M4
2008
2009
3
Same in UK
15
14
% YoY
13
12
11
10
9
8
7
6
5
4
3
2000
2001
2002
2003
2004
UK Other
ab
2005
UK OFCs
2006
2007
2008
2009
Total
4
So volatility collapsed
Equity
Fixed income
FX
ab
5
Credit market disruption
ITRAX
1000
900
800
700
600
500
400
300
200
100
0
Mar
2007
ab
Crossover (Lhs.)
250
Main (Rhs.)
200
150
100
50
Jun
2007
Sep
2007
Dec
2007
Mar
2008
Jun
2008
Sep
2008
0
Dec
2008
6
All form of risk became unloved: even
sovereign
CDS on 5Y govvies
90
80
70
60
50
40
30
20
10
0
2003
2004
2005
PORTUGAL
SPAIN
ab
2006
GREECE
GERMANY
2007
ITALY
2008
2009
FRANCE
7
SECTION 2:
The ECB reaction
ab
The problem: the interbank market is closed
250
6
EURIBOR 3M
5
EUREPO 3M
Spread EURIPO/EURIBOR 3month
200
196bp on Oct-10
4
150
3
100
2
3,7bp on average until mid-07
50
1
0
2002
ab
2003
2004
2005
2006
2007
2008
0
2002
2003
2004
2005
2006
2007
2008
2009
9
The ECB reaction: huge liquidity provision
800
Refinancing operations, allotment
750
End Dec-07
c300Bn
700
650
600
550
Last week
120Bn
Aug-07
c100Bn
500
450
400
350
2007
2008
Total
ab
2009
450Bn line
10
No liquidity provision
800
Refinancing operations, allotment
700
600
500
400
300
200
100
ZOOM
0
-1001999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-200
MRO
LTRO
Other
Total
12-month trend
800
Refinancing operations, allotment
750
700
650
600
550
500
450
400
350
300
Sep 2007
ab
Dec 2007
Mar 2008
Jun 2008
Sep 2008
11
ECB / possible solutions
 Force banks to lend to each other by cutting the
deposit facility rate
 Put more liquidity on longer maturity
 Cut rates. Our call: 2% next year. Long rates to rally
but by a few decimal points only.
 A coordinated rate cut
 Inject capital in the system
What the ECB cannot do: restore solvability/trust
ab
12
Inflation is not such a problem any longer
5
Peak 4,0%
UBS forecast
4
3
2
1
0
-1
Jan 06
Servs
ab
Jul 06
Jan 07
Jul 07
Non_energy Goods
Jan 08
Jul 08
Food
Jan 09
Energy
Jul 09
Jan 10
Total
13
The worst economic cycle in 15 years
%y/y
Old 2009F
New 2009F
2010F
US
0.3
-0.6
2.2
Canada
0.4
-0.1
1.8
Japan
0.7
0.1
1.2
Eurozone
0.3
-0.9
0.6
UK
-0.3
-1.8
0.2
Switzerland
0.9
0.1
1.0
Asia **
6.1
4.9
6.2
China
8.0
7.5
8.0
India
of which:
7.3
6.0
7.4
Latin America
2.7
2.3
3.2
Eastern Europe
4.6
2.8
3.7
of which:
6.0
3.5
4.5
Advanced economies
Russia
0.7
-0.5
1.6
Developing economies
4.2
3.6
4.6
WORLD
2.2
1.3
2.9
Global Industrial Production
1.5
-0.4
2.8
** includes Australia and New Zealand
ab
14
Money aggregates have clearly turned
A clear downward trend for M3 since November last year
14
12
% YoY
Same for loans
16
14
10
12
8
10
8
6
Change in direction
2 year low
6
4
4
2
2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
YoY growth rate
3 month moving average
4.5% reference value
ab
% YoY
Weakest ever
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Loans to the private sector
to non financial corporates
to households
of which housing
15
SECTION 3:
The governments’ reaction
ab
Guarantying deposits? Not credible!
Bank deposits typically account for 100% of GDP
250
% of GDP
If we add the existing debt of the government, we find numbers
in excess of 150% of GDP
250
Deposits (excl MFI and excl govrnt)
% of GDP
200
200
150
139 139 132
104 111
100
627
78
103 94
70
119
115
150
100
144
92
0
Eu
ro
A
Ge rea
rm
an
Fr y
an
ce
Ita
ly
S
Ne p
the ain
rla
n
B e ds
lg i
um
Au
str
G r ia
ee
c
Ire e
lan
Fin d
la
P o nd
r
Lu t u
x e ga
mb l
ou
rg
0
A
Ge rea
rm
an
Fr y
an
ce
Ita
ly
Ne Spa
the in
rla
nd
Be s
lg i
um
Au
s tr
i
Gr a
ee
ce
Ire
lan
F in d
la n
Po d
Lu rtug
xe
mb al
ou
rg
50
Eu
ro
142
179
57
50
ab
170 176
Deposits (excl MFI and excl govrnt)
217
184
174 175
188
163
17
Buying back the debt? Very expensive!
Bank debt is smaller than deposits, in some countries bank
debt is actually quite low
250
250
Bank debt
% of GDP
If we add the existing debt of the government
200
200
150
150
116
64
50
69
80
50
45
84
67
23
100
37
30
130 134
144
154
144
142
111 108
81
99
72
94
50
4
re
G e a1
rm
an
Fr y
an
ce
Ita
ly
S
Ne pa
th e in
rla
nd
Be s
lg i
um
Au
st
Gr ria
ee
ce
2
Ire
la n
F in d
la
P o nd
Lu rtug
xe
m b al
ou
rg
Eu
ro
A
ab
Ar
Ge ea1
rm
an
Fr y
an
ce
It a
ly
Ne S p
the ain
rla
n
B e ds
lg i
um
Au
s
Gr tria
ee
ce
Ire 2
la n
Fin d
la
P o nd
L u r tu
x e ga
mb l
ou
rg
0
0
Eu
ro
100
Bank debt
% of GDP
18
Increasing the Tier1 ratio? Doable!
The cost of increasing the Tier1 ratio of banks is actually
reasonable
% of GDP
10
250
Cost of increasing the Tier 1 ratio by 1ppt
9,5
% of GDP
200
8
150
6
3,5 3,2
2
3,9
2,3
3,0
106
4,0 4,2 3,5
1,9
1,9
2,9
50
70 68
68
89
39 49
63
96
66
35 37
42
0
Eu
ro
Ar
e
Ge a1
rm
an
Fr y
an
ce
Ita
ly
Ne Spa
th e in
rla
nd
Be s
lg i
um
Au
st
Gr ria
ee
ce
2
Ire
la n
F in d
la
Po nd
Lu rtug
xe
mb al
ou
rg
0
100
ab
Ar
Ge ea1
rm
an
Fr y
an
ce
It a
ly
S
Ne p
the ain
rla
n
B e ds
lg i
um
Au
s
Gr tria
ee
ce
Ire 2
la n
Fin d
la
P o nd
L u r tu
x e ga
mb l
ou
rg
4
Cost of increasing the Tier 1 ratio by 1ppt
Eu
ro
12
Almost negligible in terms of addition to the debt
19
Our view
Against the growing probability of deeper economic
downturns across Europe, the UK and the US—and
the attendant de-leveraging and asset quality
deterioration that accompanies those outcomes—we
continue to believe that, ultimately, direct capital
injections (i.e., nationalization) will be required in a
number of countries to restore the underlying
workings of the financial system.
ab
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SECTION 4:
The real economy: credit crunch
ab
Credit tightening?
It is already there
80
Credit standards
60
40
20
0
-20
2003
2004
2005
2006
Enterprises, Past 3 mos
100
80
2008
2009
Enterprises, Next 3 mo
Factors contributing to credit standards for enterprises
40
30
20
40
10
20
0
0
-10
-20
-20
2004
2005
Cost of funds
Perception of risk
2006
2007
2008
2009
Pressure from competition
Credit standards
2004
2005
2006
Housing loans, Past 3 mos
60
-40
2003
ab
2007
40
35
30
25
20
15
10
5
0
-5
-10
-15
2003
-30
2003
2007
2008
2009
Housing loans, Next 3 mo
Factors contributing to credit standards for housing loans
2004
2005
Cost of funds
2006
2007
2008
2009
Pressure from competition
Perception of risk
22
Credit tightening?
The borrowers’ point of view
Cash in hand
Credit margins charged to corporate
Credit standards
ab
23
No debt really?
Not sure about that
Aggregate balance sheet of
non-financial corporations
Deposits held with MFIs,
by NFC*
(Table 2.5, 2., Colomn 1)
Assets
Cash
Liability
Bank debt
Other assets
Market debt
MFI loans to NFC
(Table 2,4, Colonne 5)
Outstanding amounts of
securities, other than
shares, issued by NFC
(Table 4.2,1, Colonne 4)
Equity
*NFC stands for "non-financial corporations"
Non listed companies debt is actually high
4000
3800
€ Bn
All non-financial corporate (Lhs.) **
Listed companies (Rhs.) *
3600
600
580
560
3400
540
3200
520
3000
500
2800
480
2600
460
2400
440
2200
420
2000
400
00
ab
€ Bn
01
02
03
04
05
06
07
08
24
Debt servicing…
8%
Average interest rate charged on bank
loans to corporate (UBS estimate)
7%
6%
5.56%
5%
Average: 4,68%
4%
3.77%
3%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
4.0%
Corporate debt service / profits
3.90%
3.5%
3.0%
Average: 2.90%
2.5%
2.25%
2.0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
ab
25
SECTION 5:
Eastern Europe at risk
ab
What you should read
ab
27
Who is in EMEA?
ab
28
A very heterogeneous zone
Risk are not evenly spreads
Table 1: Where are the risks?
Zone
CEE-4
Baltic economies
Balkan countries
Country
Czech
Republic
Hungary
Poland
Slovakia
Estonia
Latvia
Lithuania
Bulgaria
Romania
External imbalances
Low
Low
Low
Low
HIGH
HIGH
HIGH
HIGH
HIGH
Trade risks
HIGH
HIGH
Low
HIGH
Medium
Low
Medium
Medium
Low
Financial sector
Medium
Medium
Low
HIGH
HIGH
HIGH
HIGH
Medium
HIGH
Table 2: What countries are most exposed to Eastern Europe bank risks
Zone
Country
Euro zone
Scandies
Euro area
Germany
France
Italy
Spain
Netherlands
Austria
Norway
Sweden
Risks
Medium
HIGH
Low
HIGH
Low
Medium
N/A
HIGH
HIGH
Bank exposure
Medium
HIGH
Low
Medium
Low
Low
VERY HIGH
HIGH
HIGH
FDI
Low
HIGH
Low
Medium
Low
Low
HIGH
Medium
Medium
ab
29
Latvia
Bulgaria
Estonia
Romania
Lithuania
S. Africa
Kazakhstan
Turkey
Hungary
Poland
Colombia
Czech
India
Mexico
Brazil
Korea
Ecuador
Peru
Argentina
Indonesia
Israel
Chile
Philippines
Russia
Thailand
Venezuela
Taiwan
China
Hong Kong
Malaysia
Singapore
Eastern Europe more at risk than the rest of
the Emerging world
Current account balance as a share of GDP
30
20
10
0
-10
-20
-30
ab
30
The trade link
The exposure of the euro area to Eastern Europe has increased massively
8%
7%
% of GDP
Exports from Euro Area to Eastern Europe
6%
5%
4%
3%
2%
1%
0%
00
01
Euro Area
ab
02
03
Germany
04
05
France
06
07
Italy
08
09
Spain
31
The trade link
Euro Area Exports heavily exposed to Eastern Europe
Euro area value of exports YtD (Jan-May 08)
Other; 15,3%
Eastern
Europe; 29,6%
USA; 14,8%
Middle East;
7,4%
UK; 18,1%
Asia; 14,7%
The exposure to troubled Eastern European countries is far
from negligible
3,0%
Hungary
2,5%
Balkans
2,0%
Baltic
1,5%
Ukraine
1,0%
0,5%
ab
Asia
US
UK
Ukraine
Russia
Baltic
Turkey
Sp
ain
rla
nd
s
Balkans
Sw
ed
en
Elevated risk
No
rw
ay
High risk
Ne
the
ar
ea
0,0%
Ita
ly
0,0%
0,5%
e
1,0%
Russia
Euro Area Exports as a share of GDP
% of GDP
Fr
an
c
1,5%
3,5%
y
2,0%
Turkey
Ge
rm
an
2,5%
4,0%
Euro Area Exports as a share of GDP
Eu
ro
3,0%
Not every country is equal in terms of exposure to troubled
Eastern European countries
Hungary
32
The financial link
The Western European financial system is very much exposed
to Eastern Europe
1000
900
800
700
600
500
400
300
200
100
0
Especially Poland and Russia
180
Foreign claims of Euro area banks
Foreign claims of Euro area banks
160
140
(USD billions)
120
(USD billions)
100
80
60
40
20
0
05 05 05 05
Q1 Q2 Q3 Q4
Asia and Pacifi
Mid East + Africa
06 06 06
Q1 Q2 Q3
Europe
Offshore
06
Q4
07
Q1
07 07
Q2 Q3
LatAm
07
Q4
05 05
Q1 Q2
Cyprus
Poland
05
Q3
05
Q4
06 06 06 06
Q1 Q2 Q3 Q4
Czech Republic
Russia
07
Q1
07 07
Q2 Q3
Hungary
Turkey
07
Q4
Western banks exposure to Eastern Europe (% of total foreign claims, end-07)
35
30
25
20
15
10
5
0
Austria
Belgium
CEE4
ab
France
Germany
Baltics
Italy
Netherlands
Sw eden
BUL & ROM
33
Where are the risks?
Share of FX loans in total loans (%)
ab
External debt* as % of GDP, Q1 2008
34
The CHF case
CHF funding across Europe (outstanding CHF loans to non-MFIs, in bn CHF)
Outstanding CHF Loans to Non-M FIs (CHF billions)
300
1,7
1,65
250
1,6
200
1,55
150
1,5
1,45
100
1,4
50
1,35
0
1,3
99
00
Euro Area
ab
01
Hungary
02
03
Denmark
04
UK
Poland
05
Croatia
06
EURCHF (rhs)
07
08
Austria
35
The CHF case
CHF funding relative to nominal GDP
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
in % of nom GDP
00
01
Hungary
ab
2,0%
1,8%
1,6%
1,4%
1,2%
1,0%
0,8%
0,6%
0,4%
0,2%
0,0%
in % of nom GDP
02
Poland
03
04
Croatia
05
06
Austria
07
Denmark
08
09
UK (rhs)
36
What markets say
Decline of equity markets since 1/1/08 (local
currency)
Currency depreciation against USD/EUR
since 1/1/08
CDS spread in bps
ab
37
How to play it?
Source: “Emerging Problems”, Nick Nelson, 15 July
ab
2008
38
The dream team…
Stephane Deo
Head of European Economic Research,
Euro area, ECB, France, Italy, Iberia
+44-20-7568 8924,
[email protected]
Martin Lueck
Euro area, Germany
+ 44-20-7568 0487
[email protected]
Amit Kara
UK
+44-20-7568 8020,
[email protected]
Reto Huenerwadel
Switzerland
+41 44 23 96178,
[email protected]
Sunil Kapadia
Euro Area, Scandies, Benelux
+44-20-7567 4090,
[email protected]
ab
Jen Aslin
Statistical assistant
+44-20-7568 6585,
[email protected]
39
… and the rest of the family
Chief Economist & Head of Asset Allocation
Larry Hatheway
(44 20) 7568 4053
US
Maury Harris
LATAM
Eduardo Loyo
Europe
Stephane Deo
EMEA
Japan
Asia
Reinhard Cluse
Clemens Grafe
Akira Maekawa
Duncan
Wooldridge
Global
Economics
Paul Donovan
Andy Cates
Jim O’Sullivan
(US)
Claudio Ferraz
(Brazil)
Samuel Coffin
(US)
Javier Kulesz
(Latin America)
Kevin Cummins
(US)
Gabriel Casillas
(Mexico)
Gary Cooper
(Canada)
Bernardo Mota
(Brazil)
Jessy Balarezo
Rodrigo Melo
(Brazil)
Andre Batista
(Brazil)
Martin Lueck
(Germany)
Reto Huenerwadel
(Switzerland)
Amit Kara
(UK)
Sunil Kapadia
(Nordic)
Gyorgy Kovac
Marie Antelme
(South Africa)
Jen Aslin
Shiono Takashi
Tao Wong
(China)
Chiou-Yi-Chang
(Indon., Singap.)
Philip Wyatt
(Ind., Pak., Sri
La.)
Edward Teather
(Malaysia, Philip.,
Thailand
Sean Yokota
(H-Kong, Taiwan)
Kenneth Liew
(Asset Allocation)
Jonathan
Anderson
(Global EMEA)
Patricia
Richardson
(Business Mgr)
Sophie Constable
(Database
Manager)
Lucy Coomer
Amy Tang
Isabella Leung
Scott Haslem
(Australia)
Special
adviser
George Magnus
George Tharenou
(Australia)
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