global financial crisis: an emerging european perspective
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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). - PowerPoint PPT PresentationTRANSCRIPT
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
SwedenPoland
Czech and Slovak Republics
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
0
200
400
600
800
1000
1200
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
EMBI EuropeEMBI Global
I. Financial crisis
build-up
II. Systemic outbreak
III. Systemicresponse
VI. Sovereign
Crisis?
Source: IMF
Phase 1: Financial crisis build-up
-20
-15
-10
-5
0
5
10
15
Mar
-07
May
-07
Jul-0
7
Sep-
07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-
08
Nov
-08
Jan-
09
Mar
-09
Per cent
Turkey and CEB
Russia and EEC
SEE
Euro Area
U.S.
Period of decoupling
A fleeting moment of decoupling, followed by precipitous recoupling…
Industrial production 2007-2009 (y-o-y)
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
Jan-Mar91 1/ Jul97-Feb98 Jul98-May03 Jul07-Sep08 Sep08-Jan090
2
4
6
8
10
12
14
16
18
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.
EMBIEMBI Europe
EMBI Poland
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)
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
Q3 1997: Asian currenciesdevalue sharply
Q4 1997: Closure of Ind. and Thaifinancials, Korean won devalues
Q1 1998: Social unrest in Ind.,Korean debt restructuring,
Q2 1998: Social unrest in Ind.,Russian stock market crash
Q3 1998: Russia default, Braz.stock market crash, LTCM
Q4 2008: Gov. support for largeUS, UK and Swiss banks
Q1 2009: Drop in foreign inflowsand trade
Q2 2009
Korea Thailand
Philippines Indonesia
Hungary Latvia
Romania Ukraine
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
-3.4 -4.4
-11.1
-7.8
-11.9-15
-10
-5
0
5
10
15
EmergingEurope
CA andCaucasus
Russia &Ukraine
Latin America Emerging Asia
Per centAvg 2007Q4/2008Q1 Avg 2008Q4/2009Q1
Percentage changes in external assets of BIS-reporting banks
Currency shooting avoidedCurrency overshooting avoided
Past crises
Current programs
Nominal effective exchange rates
Median and interquartile ranges
Output drop deep, sudden, and varied
-25
-20
-15
-10
-5
0
5
10
Latv
ia
Esto
nia
Ukr
aine
Turk
ey
Hun
gary
Geo
rgia
Arm
enia
Lith
uani
a
Slov
enia
Cze
ch R
ep.
Cro
atia
Kaz
akhs
tan
Rus
sia
FYR
Mac
edon
ia
Slov
ak R
ep.
Pola
nd
Serb
ia
Rom
ania
Bul
garia
Mon
golia
Mol
dova
Bel
arus
Q4 2008 Q1 2009 Q2 2009
Per cent
Phase IV: Towards sovereign crises in advanced economies?
Unemployment high - still rising in SEE and the Baltics
Unemployment rates (Per cent)
4
6
8
10
12
14
16
18
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09
Feb-
09
Mar
-09
Apr
-09
May
-09
Jun-
09
Jul-0
9
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-09
SEE Baltics CE EEC CIS Russia Turkey
Source: CEIC.
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 crisisCumulative 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?
Greece
0
50
100
150
200
2001
2003
2005
2007
2009
2011
2013
2015
General Government Debt: WEO April 2010 Projection and Counterfactual(Per cent of GDP)
Spain
-20
30
80
130
180
2001
2003
2005
2007
2009
2011
2013
2015
Portugal
-20
30
80
130
180
2001
2003
2005
2007
2009
2011
2013
2015
Italy
-20
30
80
130
180
2001
2003
2005
2007
2009
2011
2013
2015
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.
Emerging Europe recovery lagging
90
100
110
120
130
2008 2009 2010 2011
Middle East And North AfricaLatin AmericaDeveloping AsiaEBRD region
Recovery lagging, particularly in south-eastern Europe and the Baltics
80
85
90
95
100
105
110
2008 2009 2010 2011
Central EuropeThe Baltic StatesSouth-eastern Europe
SEE: Compared to January, revised 2010 growth down; negative or flat growth projected for Bulgaria and Romania.
Baltic countries: growth outlook remains negative on average
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
-15
-10
-5
0
5
10
15
20
25
30
35
-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5
Corporate credit growth,Q3-09 to Q1-10, annualised
Slovak Republic
PolandLithuaniaLatvia Hungary
Estonia
Croatia Romania
GDP growth, Q4-09 to Q1-10, annualised
Ukraine
Russia
Moldova
Kazakhstan
Belarus
Serbia
Bulgaria
Albania Slovenia
Source: National authorities via CEIC data service, EBRD staff calculations.
Large deficits lead to fiscal contractions
Structural Fiscal Balance (Per cent of GDP)
-8-7-6-5-4-3-2-10
Kaz
akhs
tan
Rus
sian
Fede
ratio
nS
lova
kR
epub
lic
Ukr
aine
Cze
chR
epub
licS
lova
kR
epub
lic
Slo
veni
a
Pol
and
Hun
gary
2009 2010 2011
Source: IMF, European Commission.
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