presentation: how latvia came through the financial crisis … · 2011. 7. 14. · 3. c h t e fe...
TRANSCRIPT
IssuesIssues
1. Causes of the Financial Crisis
2. To Devalue or NotE f th C3. Essence of the Cure
1 Causes of the Crisis1. Causes of the CrisisLoose Monetary policy of the US Fed and • Loose Monetary policy of the US Fed and ECBExcessive capital inflows• Excessive capital inflows
• Too large credit expansionR l t t b bbl• Real estate bubble
• Rising inflation• Current account deficit• No fiscal surpluspBut minimal public debt and little leverage
Credit grew 60%/year 2005–6
60
70percent
50
30
40
10
20
0
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
‐20
‐10
Inflation 18%, gross wages +33% construction prices +30% at peakconstruction prices +30% at peak
40( t h th di i d f th i )
30
(percent change over the corresponding period of the previous year)
20
0
10
‐10
0
2004 2005 2006 2007 2008 2009 2010
‐20Inflation (consumer price index) Gross wages Construction prices
Current account for larger than foreign direct investment, 2004–7: 22.5% of GDP, 4 7 5
10percent of GDP
0
5
‐5
0
2004 2005 2006 2007
‐10
‐20
‐15
‐25
Foreign direct investment Current account balance
Key ProblemsKey Problems1. Overheating followed by
“ dd ” “sudden stop” 2 Big falls in GDP: Latvia 25%2. Big falls in GDP: Latvia 25%3. Caused large budget deficitsNeeded: Liquidity, budget cuts &wage cutswage cuts
2 Why Devalue?2. Why Devalue?Paul Krugman: “Latvia is the newPaul Krugman: Latvia is the new Argentina.”g• Latvia’s competitiveness had fallen too sharplyfallen too sharply• Internal devaluation was politically impossibleLat ia needed stim l s• Latvia needed stimulus
Why Devalue? (2)Why Devalue? (2)D f d fl ti l• Danger of deflationary cycle
• Latvia did not deserve helpLatvia did not deserve help• “Latvia doesn’t produce much t t”to export”• Roubini: “devaluation seemsRoubini: devaluation seems unavoidable”
But devaluation is riskyy• Devaluation could have beenDevaluation could have been uncontrollably large (Belarus)
Lead to wild inflation (Belarus)• Lead to wild inflation (Belarus)• Less reforms• Bank system could have collapse (Ukraine)(Ukraine)• Mass bankruptcies
f• Real foreign debt would have doubled
Instead: Internal Devaluation
Fi l dj t t 9 5% f GDP i• Fiscal adjustment 9.5% of GDP in 2009 & total 16%009 & tota 6%
• Reduced public salaries by 26% & i t l i b 10%& private salaries by 10%
• Closed half state agenciesClosed half state agencies• Dismissed 29% of civil servantsLean & efficient public sector
Conclusion on DevaluationConclusion on DevaluationN h t i ld h• No exchange rate regime could have
salvaged the open Latvian economy• Fixed exchange rate saved Latvia from collapse of bank system, mass bankruptcies p y , pand doubling of foreign debt• It facilitated vital structural reformsIt facilitated vital structural reforms• Latvia is ready for adoption of euro in 2014• Economists need to go beyond stylized• Economists need to go beyond stylized facts to real facts.
3 Crisis Resolution3. Crisis Resolution•Early and comprehensive fiscal adjustment
•IMF & EU program b f fi i l •7.5 bn euro of financial
assistance 37% of GDPassistance, 37% of GDP
16% of GDP Fiscal consolidation, 2008‐11
9
10
percent of GDP
6
7
8
6.7
5
6
2.03
4
2.82.1
1.50 5
0.7
1
2
0.50
2008 2009 2010 2011
revenue expenditure
Credit default swap rates peaked in March 200920091400
5‐year, basis points
1000
1200
800
400
600
200
400
0Jan‐08Mar‐08May‐08 Jul‐08 Sep‐08 Nov‐08 Jan‐09Mar‐09May‐09 Jul‐09 Sep‐09 Nov‐09 Jan‐10Mar‐10May‐10 Jul‐10 Sep‐10 Nov‐10 Jan‐11
Market interest rates peaked in June 2009
30percent per annum
in June 2009
25
15
20
10
15
5
0
Oct‐08 Dec‐08 Feb‐09 Apr‐09 Jun‐09 Aug‐09 Oct‐09 Dec‐09 Feb‐10 Apr‐10 Jun‐10 Aug‐10 Oct‐10
RIGIBOR 3 month RIGIBOR 6 month RIGIBOR 12 month
Foreign currency reserves bottomed out late June 2009
6billions of euros
late June 2009
5
3
4
3d tranche of EC loan received
4th tranche of IMF loan received
22nd tranche of IMF
loan received
1st tranche of WB loan received
3d tranche of IMF loan received
loan received
1
1st tranche of EC loan received
2nd tranche of EC loan received
loan received
0
Jan‐09 Mar May Jul Sep Nov Jan‐10 Mar May Jul Sep
Unemployment peaked in early 2010
25percent of labor force
20
15
10
5
0
2008Q1 Q2 Q3 Q4 2009Q1 Q2 Q3 Q4 2010Q1 Q2 Q3 Q4
Exports Led the Recovery from d 2010
60percent of corresponding period of
end 2010
40
previous year
20
-20
0
20
08
-I II III
IV V VI
VII
VII
IIX X X
IX
II2
00
9-I II III
IV V VI
VII
VII
IIX X X
IX
II2
010
-I II III
IV V VI
VII
VII
IIX X X
IX
II
-40
0
-60Exports Imports
GDP Growth: 3rd Q 201015
percent of corresponding period of previous year
3 Q
5
10
0
5
2007 2008 2009 2010
‐10
‐5
‐15
‐25
‐20
9 Lessons from Latvia for 9 Lessons from Latvia for the Worldthe World
1.1.Devaluation was neither necessary Devaluation was neither necessary nor inevitablenor inevitablenor inevitablenor inevitable
2.2.Goal of euro accession is valuableGoal of euro accession is valuable33 E l fi l dj t t f blE l fi l dj t t f bl3.3.Early fiscal adjustment preferableEarly fiscal adjustment preferable4.4.Better to cut public expenditures Better to cut public expenditures p pp p
than to raise taxesthan to raise taxes55 International rescue should be largeInternational rescue should be large5.5.International rescue should be large International rescue should be large
and frontand front--loadedloaded
9 Lessons from Latvia for 9 Lessons from Latvia for the Worldthe World
6. Strange myth that democracies 6. Strange myth that democracies cannot cut public expenditurescannot cut public expenditurescannot cut public expenditurescannot cut public expenditures
7. Unstable coalition government 7. Unstable coalition government d f i i l tid f i i l tigood for crisis resolution good for crisis resolution
8. Populism is not very popular in a 8. Populism is not very popular in a p y p pp y p pserious crisisserious crisis
9 International macroeconomics9 International macroeconomics9. International macroeconomics 9. International macroeconomics more harmful than usefulmore harmful than useful
