Transcript Slide 1 - Seðlabanki Íslands

Seðlabanki Íslands
Iceland: From boom to bust
and back again
Visitors from Lehigh University
14 May 2010
Thórarinn G. Pétursson
Chief Economist and Monetary Policy Committee member
Imbalances build up
A monster banking system
emerges...
• The final steps in
privatising the banks
where taken in 2003
• From then, they
expanded rapidly
– Fed by the global liquidity
abundance and appetite
to take risks
– Financed through debt
accumulation
Banks' balance sheet expansion and
leverage
% of GDP
Total assets/Equity
1000
18
900
17
800
700
16
600
500
15
400
14
300
200
13
100
0
12
2003
2004
2005
Total assets (left axis)
2006
2007
2008
Leverage ratio (right axis)
Consolidated accounts of three largest commercial banks. 2008 data is end-June.
Source: Central Bank of Iceland.
... In size and speed of expansion
almost unprecedented
Expansion of bank balance sheets in the
run-up to the current global crisis
Banking group assets as % of GDP in the
current global crisis
Average yearly growth of bank assets in the period 2003-2007
70
1000
%
% of GDP
900
800
60
700
50
600
40
500
400
30
300
20
200
10
100
Iceland
Switzerland
UK
Ireland
France
Germany
Spain
Australia
Japan
Canada
Italy
Iceland
Ireland
Spain
UK
Euro area
Denmark
USA
Sweden
Finland
US
0
0
1. Total consolidated banking group assets from domestically owned banking
sector only. This includes assets of domestic banks held abroad. End-2007
except UK (end 2008) and Iceland (June 2008).
Sources: Bank of England, Central Bank of Iceland.
Sources: IMF, Central Bank of Iceland
Private sector balance sheets also
expanded rapidly...
Private sector lending as % of GDP in a few
countries in the current global crisis
Household debt as % of disposable
income in the current global crisis
% of GDP
Comparison between 2002 and 2007
500
300
400
% of disposable income
250
300
200
150
200
100
100
50
Sources: Bank of England, Reuters EcoWin, Central Bank of Iceland.
2002
2007
Sources: OECD, Central Bank of Iceland.
Denmark
Iceland
Ireland
Norway
USA
New Zealand
Australia
Spain
Euro area
Iceland
USA
Denmark
UK
Switzerland
Spain
Sweden
Germany
Finland
1.The value is for 2007.
France
0
0
... Asset price bubbles emerged...
Real equity price raises in the run-up to the
current global crisis
Real house price raises in the run-up to the
current global crisis
Q1/2001-Q3/2006
Q1/2001-Q3/2006
%
%
350
80
300
70
250
60
50
200
40
150
30
100
1. Real equity prices peaked in Iceland in July 2007 when they had risen
by 519% from January 2002.
Sources: IMF, Central Bank of Iceland
Spain
New Zealand
Ireland
France
Iceland
UK
Denmark
Sweden
Canada
Australia
Finland
Norway
USA
Iceland
Norway
New Zealand
Denmark
Canada
Spain
Sweden
Australia
Ireland
Italy
UK
0
Finland
0
France
10
USA
50
Italy
20
Real house price continued to increase in Iceland after they peaked in the US.
The increase from Q1/2001 to Q4/2007 was 67%.
Sources: IMF, Central Bank of Iceland
... And huge economic imbalances
built up
Current account balance
Expenditure shares in GDP and 30 year
average shares
% of GDP
% of GDP
15
70
10
60
5
0
50
-5
40
-10
-15
30
-20
20
-25
-30
10
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Consumption
Average consumption share
Investment
Average investment share
Imports
Average import share
Source: Statistics Iceland, Central Bank of Iceland.
2000
2002
2004
2006
2008
Trade balance
Underlying income account balance
Underlying current account balance
Source: Statistics Iceland, Central Bank of Iceland.
The bubble bursts
It started with a collapse of the
currency...
• The ISK and asset price
bubbles were fed by easy
access to global liquidity
at very low interest rates
• As uncertainty increased
in 2007 this access
became gradually more
difficult...
• ... And suddenly stops
completely early 2008...
• ... Leading to a collapse
of the currency
International financial market liquidity
and the króna exchange rate
Liquidity index
Index, January 2005 = 100
2
110
1
100
0
90
-1
80
-2
70
-3
60
-4
50
-5
40
2002
2003
2004
2005
2006
2007
2008
2009
Financial market liquidity (left axis)
Effective exchange rate (right axis)
The liquidity index shows the number of standard deviations from the mean
(exponential moving average) from a simple average of nine liquidity measures,
Source: Bank of England, Central Bank of Iceland.
... Followed by a collapse of other
asset prices ...
Real equity price declines in a few crises
countries
Real house price declines in a few crisis
countries
0 %
-10
0 %
-20
-20
-40
-30
-60
-40
-60
-100
Argentina (2001)
Hong Kong (1997)
Norway (1987)
Sweden (1991)
Historical average
Phillippines (1997)
Japan (1992)
Finland (1991)
USA (1929)
Columbia (1998)
Spain (1977)
Malaysia (1997)
Indonesia (1997)
Korea (1997)
Thailand (1997)
Iceland (2008)
-80
USA (1929)
Malaysia (1997)
Thailand (1997)
Korea (1997)
Argentina (2001)
Norway (1899)
Sweden (1991)
Spain (1977)
Historical average
Japan (1992)
Norway (1987)
Indonesia (1997)
Finland (1991)
Columbia (1998)
Iceland (2008)
Philippines (1997)
Hong Kong (1997)
-50
1.Central Bank of Iceland baseline forecast.
1.Central Bank of Iceland baseline forecast.
Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different:
Eight Centuries of Financial Folly, Princeton University Press; Central
Bank of Iceland.
Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different:
Eight Centuries of Financial Folly, Princeton University Press; Central
Bank of Iceland.
... And eventually the whole banking
system fell
Commercial banks' assets in various
previous financial crises
% of GDP
Share of banking system in insolvency in
various previous crises
1000
% of total banking system assets
100
900
800
80
700
600
60
500
400
40
300
20
200
100
Iceland ('08)
Norway ('87)
Equador ('98)
Russia ('98)
Chile ('81)
Indonesia ('97)
Finland ('91)
Sweden ('91)
Spain ('77)
Mexico ('94)
Argentina ('80)
Iceland ('08)
Japan ('91)
Venezuela ('94)
Turkey ('00)
Thailand ('97)
Sweden ('91)
Russia ('98)
Norway ('87)
Mexico ('94)
Malaysia ('97)
South-Korea ('97)
Indonesia ('97)
Finland ('91)
Equador ('98)
Chile ('81)
1. The year in parentheses represents the onset of the crisis in the
country concerned.
Sources: Bank of England, Central Bank of Iceland.
Malaysia ('97)
0
0
1. The year in parentheses represents the onset of the crisis in the country
concerned.
Sources: Caprio, Klingebiel, Laeven and Noguera (2005), Central Bank of
Iceland.
Large economic adjustments
The large currency deprecation led to
an inflation spike...
Exchange rate of the króna
EURISK, USDISK, GBPISK
Inflation
3 January 2000 = 100
250
20
230
230
18
210
210
16
190
190
170
170
150
150
130
130
110
110
90
90
70
70
50
50
250
2008
2009
2010
USD (left axis)
EUR (left axis)
GBP (left axis)
Effective exchange rate - broad TWI (right axis)
Source: Central Bank of Iceland.
Changes from previous year (%)
14
12
10
8
6
4
2
0
CPI
Core inflation 2
Inflation target
Source: Statistics Iceland.
Core inflation 1
Core inflation 3
... With sharp increases in
unemployment...
Unemployment increases in some previous
crises
Expected unemployment increases from
2007 to 2010 in the current global crisis
25 Percentage points
Percentage points
14
20
12
10
15
8
10
6
5
4
2
1.Central Bank of Iceland baseline forecast.
Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different:
Eight Centuries of Financial Folly, Princeton University Press; Central
Bank of Iceland.
Sources: IMF.
Spain
Ireland
Iceland
USA
France
New Zealand
UK
Finland
Sweden
Denmark
0
Norway
USA (1929)
Finland (1991)
Columbia (1998)
Spain (1977)
Iceland (2008)
Sweden (1991)
Historical average
Argentina (2001)
Korea (1997)
Norway (1987)
Hong Kong (1997)
Thailand (1997)
Philippines (1997)
Japan (1992)
Indonesia (1997)
Malaysia (1997)
0
... And huge contraction in
consumption...
• A sharp contraction in
consumption followed the
crisis as households
deleveraged and tried to
restore their balance sheet
– A 8% contraction in 2008 and a
15% contraction in 2009
• A significant share of the
consumption contraction
directed towards imported
durable goods
– A large import content of
domestic expenditure
– Import penetration falls
– With a small manufacturing
sector, a part of the crisis is
therefore exported
Private consumption and contributions
of its main components
Year-on-year change (%)
15
10
5
0
-5
-10
-15
-20
1991
1995
1999
2003
2007
Imported durable consumer goods
Housing
Non-durable consumer goods and services
Total privat consumption
Source: Statistics Iceland, Central Bank of Iceland.
... But net exports provided a buffer
for output
Output growth and contribution of
underlying components
World trade and Icelandic exports
Volume index, 1995 = 100
250
20
230
15
Volume change from year earlier (%)
10
210
5
190
0
170
-5
150
-10
130
-15
110
-20
90
-25
1995 1997 1999 2001 2003 2005 2007 2009 2011
Total imports among Iceland's main trading partners
Iceland's exports
Source: OECD, Central Bank of Iceland.
2000
2002
2004
Private consumption
Investment
Net trade
2006
2008
Public consumption
Change in inventories
Output growth
Source: Statistics Iceland, Central Bank of Iceland.
Recession deep in international and
historical comparison
Economic recovery in various countries
Economic recovery in previous recessions
Seasonally adjusted GDP, index Q3/2008 = 100
Index, GDP the year prior to crisis = 100
115
104
110
102
105
100
100
95
98
90
96
85
94
80
92
75
70
90
2006Q1
2008Q1
2010Q1
Iceland
US
Euro area
UK
Ireland
Latvia
2012Q1
0
1
Recession in 2009
2
3
Years after outset of recession
Recession in 1991
Recession in 1967
Source: Global Insight, Central Bank of Iceland.
4
Source: Statistics Iceland, Central Bank of Iceland.
Policy responses to the crisis
Monetary policy
Initial responses
• High leverage and significant
FX borrowing
– The ISK collapse wreaked havoc
in domestic balance sheets
• The initial focus of monetary
policy
– Fostering stability of the ISK
while the restructuring and
recovery of balance sheets
takes place
– Avoid disorderly capital
outflows further weakening the
ISK
• Conventional monetary
policy (high interest rate) and
unconventional monetary
policy (capital controls) used
Proportion of total foreign-denominated
debt
%
80
70
60
50
40
30
20
10
0
Households
Businesses
Source: Central Bank of Iceland.
Municipalities
The króna has stabilised as risk
premia has subsided
CDS spread for Iceland
Exchange rate of the króna
Basis points
1,600
200
EURISK
%
5.0
1,400
4.5
180
4.0
160
3.5
3.0
140
1,200
1,000
800
2.5
120
2.0
1.5
100
1.0
80
600
400
200
0.5
60
0.0
2002 2003 2004 2005 2006 2007 2008 2009 2010
0
mar. 07
sep. 07 mar. 08
EURISK (left axis)
90 day standard deviation of daily changes in the
EURISK exchange rate (right axis)
Source: Central Bank of Iceland.
Source: Bloomberg.
sep. 08 mar. 09
sep. 09 mar. 10
Monetary policy
Policy in the aftermath of the crisis
• With currency stability
enhanced, monetary
policy has gradually been
eased as inflation
subsides and inflation
expectations become reanchored
• Capital controls have
given monetary policy
more room for easing
stance to support the
real economy
Central Bank of Iceland interest rates
and short-term market rates
%
24
22
20
18
16
14
12
10
8
6
jan. 09
apr. 09
júl. 09
okt. 09
jan. 10
apr. 10
Collateral loan rate
Maximum rate on 28 CDs
O/N REIBOR
CBI current account rates
Overnight CBI rates
Source: Central Bank of Iceland.
Fiscal policy
Tightening needed to ensure debt sustainability
• Fundamental changes in
Government finances
• The crisis led to an enormous
turnaround from a fiscal
surplus to a large deficit
– 2007: +4% of GDP
– 2008: -13% of GDP
• Gross debt increased from
below 30% of GDP in 2007 to
96% in 2009
• Expenditure cuts and
increased taxes needed to
ensure a gradual closing of
the deficit and a sustainable
debt path
Public sector finances
% of GDP
% of GDP
10
120
5
90
0
60
-5
30
-10
-15
0
2000
2002
2004
2006
2008
2010
2012
Balance (left axis)
Gross debt (right axis)
Net debt (right axis)
Source: Ministry of Financi, Statistics Iceland, Central Bank of Iceland.
The economic outlook
Economic outlook
Recovery set to start in Q3/2010
Unemployment rate and employment
growth
% of labour force
Output growth
Quarter-on-quarter change (%)
%
12
4
10
2
8
0
10
8
6
4
2
6
-2
0
-2
4
-4
2
-6
-4
-6
-8
0
-8
2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1
-10
2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1
Employment growth (seasonally adjusted, right axis)
Quarterly GDP growth (seasonally adjusted)
Unemployment rate (left axis)
Annual GDP growth
Source: Statistics Iceland, Central Bank of Iceland.
Source: Statistics Iceland, Central Bank of Iceland.
Economic outlook
Disinflation continues as ISK remains stable
Inflation outlook
Exchange rate of the króna
Changes from previous year (%)
EURISK
18
200
16
180
14
12
160
10
140
8
6
120
4
100
2
0
80
2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1
EURISK
Source: Central Bank of Iceland.
2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1
Headline inflation
Inflation excluding direct tax effects
Inflation target
Source: Statistics Iceland, Central Bank of Iceland.