Transcript Slide 1
Global financial crisis: An emerging European perspective Erik Berglof, Chief Economist, EBRD Comparing to the Great Depression: World industrial production, now vs. then Source: Eichengreen, O´rourke (2010) Comparing to the Great Depression: Volume of world trade, now vs. then Source: Eichengreen, O´rourke (2010) Comparing to the Great Depression: World equity markets, now vs. then Source: Eichengreen, O´rourke (2010) Smaller economies, then and now Belgium Poland Czech and Slovak Republics Sweden Outline A bad crisis, but stopped in its tracks Policy response strong, but left scars Dealing with aftershocks – Unemployment – Fragile banks + regulatory tsunami – Fiscal – Greece, Eurozone… Altered prospects for emerging Europe – and the Euro The phases of the crisis 1200 1000 I. Financial crisis build-up II. Systemic outbreak III. Systemic response VI. Sovereign Crisis? 800 600 EMBI Europe EMBI Global 400 200 0 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Source: IMF Phase 1: Financial crisis build-up A fleeting moment of decoupling, followed by precipitous recoupling… Per cent 15 Period of decoupling 10 5 0 Turkey and CEB -5 Russia and EEC SEE -10 Euro Area -15 U.S. Industrial production 2007-2009 (y-o-y) Mar-09 Jan-09 Nov-08 Sep-08 Jul-08 May-08 Mar-08 Jan-08 Nov-07 Sep-07 Jul-07 May-07 Mar-07 -20 Phase II: Systemic outbreak Emerging markets more resilient Average response of EMBI to daily changes in the VIX during periods of financial volatility in the United States 18 16 EMBI Europe 14 EMBI 12 10 8 EMBI Poland 6 4 2 0 Jan-Mar91 1/ Jul97-Feb98 Jul98-May03 Jul07-Sep08 Sep08-Jan09 Note: Based on regression of daily changes in EMBI spreads on changes in the VIX in periods during w hich the VIX consistently exceeded 20 points. 1/ Constrained by data availability. Turbulence period started in July 1990. Crisis challenge: Systemic problem – systemic response Source: Bankscope, bank websites Phase III: Systemic response Crisis response: massive, comprehensive and coordinated Domestic policies: Massive in western Europe and mature in central and eastern Europe Massive & coordinated international support – IMF resources tripled from $250 to $750 bn – EU BOP support quadrupled from €12.5 to €50 bn – G20: capital to multilateral development banks Parent banks maintained exposures A new coordination platform – Vienna Initiative Magnitude of official support massive Official support (percent of GDP) Q2 2009 Q1 2009: Drop in foreign inflows and trade Q4 2008: Gov. support for large US, UK and Swiss banks Q3 1998: Russia default, Braz. stock market crash, LTCM Q2 1998: Social unrest in Ind., Russian stock market crash Q1 1998: Social unrest in Ind., Korean debt restructuring, Korea Thailand Philippines Indonesia Hungary Latvia Romania Ukraine Q4 1997: Closure of Ind. and Thai financials, Korean won devalues Q3 1997: Asian currencies devalue sharply 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Improvised response: The Vienna Initiative Fill institutional vacuum - coordinate – Bring together authorities (home and host) – Private and public sector Incentivise banks to coordinate – Regulatory incentives (IMF/EU prog rams) – Contingent capital (Joint IFI Action Plan) – “Naming/shaming” (memoranda of understanding) Intensify Information-sharing – Coordinate within IMF/EU programs + IFI collaboration Sudden Stop in Emerging Europe muted Percentage changes in external assets of BIS-reporting banks Per cent 15 Avg 2007Q4/2008Q1 Avg 2008Q4/2009Q1 10 5 0 -5 -3.4 -4.4 -7.8 -10 -11.1 -11.9 -15 Emerging Europe CA and Caucasus Russia & Ukraine Latin America Emerging Asia Currency Currencyshooting overshooting avoided avoided Nominal effective exchange rates Current programs Median and interquartile ranges Past crises Q4 2008 Q2 2009 Belarus Moldova Mongolia Bulgaria Romania Serbia Poland Slovak Rep. FYR Macedonia Q1 2009 Russia Kazakhstan Croatia Czech Rep. Slovenia Lithuania Armenia Georgia Hungary Turkey Ukraine Estonia Latvia Output drop deep, sudden, and varied Per cent 10 5 0 -5 -10 -15 -20 -25 Phase IV: Towards sovereign crises in advanced economies? Unemployment high - still rising in SEE and the Baltics Unemployment rates (Per cent) 18 16 14 12 10 8 6 SEE Source: CEIC. Baltics CE EEC CIS Russia Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 4 Turkey Europe’s banks in unclear state Weak balance sheets – Total loan write-downs (IMF: USD 442 bn) + higher unrecognised share than in other markets Still net tightening (ECB lending survey) Compounded by regulatory reform in full swing: – Capital positions and liquidity – costs for growth – Uncertainty over bank tax, requirements of bank restructuring, and collaboration between supervisors Emerging Europe still depend on bank finance Regulatory tsunami Stronger financial regulation needed Financial sectors must share eventual crisis costs But… Timing in a world of multi-speed regional growth May stunt market development (e.g., restricting liquidity risks and maturity transformation) Regional differences lost in global regulation (cross-border banking worked for Emerging Europe before and during crisis, but not everywhere else) Debt increase follows banking crisis Cumulative increase in real public debt in the three years following the banking crisis Source: Reinhart and Rogoff (2008) What if the crisis had not happened? General Government Debt: WEO April 2010 Projection and Counterfactual (Per cent of GDP) 180 Greece 150 130 100 80 50 180 2015 2013 2011 2009 2007 2005 2003 Actual Counterfactual Note: Calculations based on assumption that (1) half the actual structural fiscal loosening (estimated as in WEO April 2010) in 2009 and none thereafter and (2) unit revenue elasticity. 2015 2013 2011 2009 2007 2015 -20 2013 -20 2011 30 2009 30 2007 80 2005 80 2003 130 2001 130 Italy 2005 Portugal 2003 2015 2013 2011 2009 2007 2005 2003 2001 -20 2001 30 0 180 Spain 2001 200 Emerging Europe recovery lagging Middle East And North Africa Latin America Developing Asia EBRD region 130 120 110 100 90 2008 2009 2010 2011 Recovery lagging, particularly in southeastern Europe and the Baltics Central Europe The Baltic States South-eastern Europe 110 105 SEE: Compared to January, revised 2010 growth down; negative or flat growth projected for Bulgaria and Romania. 100 95 90 Baltic countries: growth outlook remains negative on average 85 80 2008 2009 2010 2011 Why recovering more slowly? Export dependence on EU limits export demand Follows from exceptionally large output drops: – High unemployment weighs on domestic demand – Risk perceptions, non-performing loans → credit growth – Fiscal consolidation 2010-11 → contractionary Corporate credit stagnating/contracting Corporate credit growth, Q3-09 to Q1-10, annualised 35 Belarus 30 25 20 Serbia 15 10 Croatia 5 Romania Moldova Slovenia Ukraine Slovak Republic Russia Bulgaria Estonia Poland Lithuania Hungary Kazakhstan Albania 0 -5 Latvia -10 -15 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 Source: National authorities via CEIC data service, EBRD staff calculations. GDP growth, Q4-09 to Q1-10, 5 annualised Large deficits lead to fiscal contractions Structural Fiscal Balance (Per cent of GDP) Source: IMF, European Commission. Hungary Poland Slovenia Slovak Republic Czech Republic 2011 Ukraine 2010 Russian Federation Kazakhstan 2009 Slovak Republic 0 -1 -2 -3 -4 -5 -6 -7 -8 Emerging Europe out of sync Slower monetary easing, but quicker ‘fiscal exit’ in Eurozone – premature for emerging Europe Divergence also within Emerging Europe with some countries getting large capital inflows Regulation with increased capital requirements risks coming too early Is there a Phase V of sovereign crises in emerging Europe…? Emerging Europe and the Eurozone Eurozone at a crossroads €750bn buys time to build fiscal sustainability So far only €60bn – not enough given pressures ECB shift to purchases of sovereign debt critical Large permanent mutual fiscal insurance mechanism with rigorously enforced rules… …or a break up with unimaginable implications for European project… Eurozone as an optimal currency area Optimal currency areas partly endogenous Significant convergence since formation – Real business cycle But also persistent or increasing differences – Diverging inflation => real exchange rates misaligned Eurozone as the end zone Costs and benefits of accession shifted: (1) Costs of loss of flexibility and premature entry? => Prepare better (local capital markets) (2) Commitment value of Euro anchor? – Benefits smaller – Uncertainty about rules and long-term future – Timing for entry more distant => Strengthen/clarify architecture Thank you Needed: a new growth agenda Safer growth after the ‘great moderation’: – Medium term, counter-cyclical macro policies – Diversify funding sources - local capital markets – Diversify exports and develop intra-regional trade Strengthened competitiveness: – Preventing a rapid rise of wage costs – Stimulating firm entry and exit, and SME growth – Exploiting cost advantages in the periphery