Transcript of GDP 2007 2008f 2009f 2010f

Small economies and financial crisis
Horwath Nordic
30.1.2009
Pentti Hakkarainen
Deputy Governor
Bank of Finland
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
1
A chronology of the global financial crisis
Money and financial market crisis
Changes in the financial systems and structures
Weakening of growth prospects
Deterioration of public-sector finances
?
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
2
Financial markets and economies are
interconnected globally
Stock indices
Consumer confidence
United States (left axis)
Euro area (right axis)
United States (S&P 500)
Euro area (DJ STOXX 600)
150
Index
170
Index
Index
145
10
0
125
120
-10
100
95
-20
70
75
-30
45
50
1999
2001
Source: Bloomberg.
2003
2005
2007
2009
20
1999
-40
2001
2003
2005
2007
2009
Source: Bloomberg.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
3
Financial market conditions in the U.S.
as compared with the average conditions during 1992-2009
Overall index on the conditions in the money, fixed income and stock markets
4
Index
2
0
-2
-4
-6
-8
-10
-12
1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: Bloomberg.
* Index shows how many standard deviations the current market conditions differ from the 1992-2009 average.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
PTMO/MP
4
Risk premia in the interbank markets
in three months maturity
United States
4,0
United Kingdom
Euro area
Percentage points
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
1/2007
4/2007
7/2007
10/2007
1/2008
4/2008
7/2008
Source: Bloomberg.
* Differences between Libor/Euribor and OIS rates
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
10/2008
1/2009
PTMO/MP
5
Money market rates in the euro area
1 month Euribor
6,0
3 months Euribor
12 months Euribor
ECB policy rate
Percent
5,5
5,0
4,5
4,0
3,5
3,0
2,5
2,0
1,5
1,0
1/2006
7/2006
1/2007
7/2007
1/2008
Source: European Banking Federation, European Central Bank.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
7/2008
1/2009
PTMO/MP
6
Eurosystem’s open market operations
Fine-tuning operations (1-5 days)
Net recourse to the standing facilities (1 day)
Main refinancing operations (1 week)
Supplementary longer-term refinancing operations (1-6 months)
1 000
EUR billion
Longer-term refinancing operations (3 months)
800
600
400
200
0
-200
-400
5/2007
8/2007
11/2007
2/2008
5/2008
8/2008
Source: Bank of Finland.
11/2008
2/2009
PTMO/MP
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
7
Bank credit risk premia
in the credit derivative markets (CDS)
3,5
UBS
ABN Amro
Barclays
Deutsche Bank
Banco Santander
Societe Generale
% -points
3
2,5
2
1,5
1
0,5
0
7/2007 9/2007 11/2007 1/2008 3/2008 5/2008 7/2008 9/2008 11/2008 1/2009 3/2009
Source: Bloomberg.
PTMO/MP
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
8
Corporate credit risk premia
in the credit derivative markets (CDS)
Below investment grade corporations
Investment grade corporations, all sectors
Percentage points
Investment grade corporations, financial sector
12
10
8
6
4
2
0
4/07
6/07
8/07
10/07
12/07
2/08
4/08
6/08
8/08
Source: Bloomberg.
10/08
12/08
PTMO/MP
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
9
Sovereign credit risk premia
in the credit derivative markets (CDS)
Greece
Spain
350
Ireland
Finland
Italy
France
Sweden
Germany
United Kingdom
Basis points
300
250
200
150
100
50
0
1.1.2008
1.3.2008
1.5.2008
1.7.2008
1.9.2008
1.11.2008
Source: Bloomberg.
1.1.2009
1.3.2009
PTMO/JH
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
10
Monthly returns of stock indices
in the United States and the Euro area
10 %
United States (S&P 500)
Percent
Euro area (DJ STOXX 600)
5%
0%
-5 %
Until
26.1.2009
-10 %
-15 %
-20 %
7/07
9/07
11/07
1/08
3/08
5/08
7/08
9/08
Source: Bloomberg.
11/08
1/09
3/09
PTMO/MP
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
11
International capital flows in the United States
Net foreign portfolio inflows to the U.S.
140
Net domestic portfolio inflows to the U.S.
USD bln
120
100
80
60
40
20
0
-20
-40
-60
1990
1992
1994
1996
1998
2000
2002
2004
Source: US Treasury.
* Three months moving averages
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
2006
2008
PTMO/MP
12
Commodity price indices
Agriculture
120
Industrial metals
Energy
Index, 1.7.2008=100
100
80
60
40
20
1/2007
7/2007
1/2008
7/2008
Source: Bloomberg, S&P.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
1/2009
PTMO/MP
13
GDP growth forecasts for 2009
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
14
Economic outlook deteriorating rapidly
Forecast for Finland
GDP
Consumption
Investment
Exports
Imports
Unemployment
Public deficit
Memorandum items
World imports
US GDP
Euro area GDP
Euro area deficit
Bank of Finland
December 2008
2009
2010
-0.5
0.7
0.7
1.9
-6.4
-1.1
-3.3
1.0
-2.1
2.6
7.2
7.7
2.0
0.7
3.1
-0.9
-0.5
..
5.7
0.7
1.0
..
European Commission
January 19, 2009
2009
2010
-1.2
1.2
0.5
1.8
-3.8
0.3
-4.0
1.1
-1.7
1.4
7.8
7.0
2.0
0.5
negative
-1.6
-1.9
-4.0
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
..
1.7
0.4
-4.4
15
Public finances in Finland
 History of fiscal prudence.
– Gross public debt low, around 30% of GDP.
– Public and semi-public financial assets 60-70% of GDP.
 Solid reputation invaluable in a crisis
– ... particularly for a small and peripheral country.
 High credibility.
– Credit derivatives price the likelihood of Finnish default the 2nd
lowest in the EU (after Germany).
 Downside: small issuer, low liquidity
– Relatively high liquidity premium.
 Overall cost of public debt among the lowest in the EU.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
16
General government balance in
some EU countries
(Commission forecasts)
% of GDP
2007
2008f
2009f
2010f
Spain
2,2
-3,4
-6,2
-5,7
Ireland
0,2
-6,3
-11,0
-13,0
Italy
-1,6
-2,8
-3,8
-3,7
Greece
-3,5
-3,4
-3,7
-4,2
France
-2,7
-3,2
-5,4
-5,0
Germany
-0,2
-0,1
-2,9
-4,2
Finland
5,3
4,5
2,0
0,5
Lähde: European Comission, Interim Forecast, January 2009.
f = forecast
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
17
10-year Euro government bond yields
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
18
Finland and the financial crisis
– risks and challenges
 Finnish economy strongly dependent on world trade.
– A highly open economy, Finland was a prime beneficiary of
globalisation. Now vulnerable to breakdown of global trade and a
potential increase in protectionism.
– High share of capital goods – exposure to investment-led recession.
 No exchange rate policy – vulnerable to competitors’
exchange rate depreciation.
– Sweden, Russia.
 Increase in risk aversion and flight to quality puts peripheral
countries at a disadvantage.
– Small country pays a higher liquidity premium.
 Structure of the banking sector complicates support
measures.
– Foreign ownership, cooperative structure.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
19
Finland and the financial crisis - strengths
 Global currency
– Shields from volatility and speculative pressures.
– Monetary policy anchors inflation expectations.
 Strong balance sheets
– Banking sector well capitalised and with negligible exposure to
toxic assets.
– Corporate sector balance sheets generally strong.
– Robust public finances provide room for fiscal stimulus.
 Balanced economic starting point.
– Strong current account.
– No significant property bubble or construction sector
overheating.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
20
Thank you!
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
21