The Eurozone Sovereign Debt Crisis:Lessons for Taiwan

Sheng-Cheng HuAcademia Sinica

2012.12.5

NTU Finance Conference

Outline

• Introduction• Effects on the Taiwan Economy• Implications and Responses• Concluding Remarks

Introduction• The global financial crisis: Immediate cause for

the Eurozone debt crisis to take place in 2010.o Two-speed recovery as a result of concerted efforts of

major countries to aggressively pursue expansionary fiscal and monetary policy.

o Five largest investment banks in the US disappeared from the market. “The need to eliminate firms that are effectively ‘too large to fail’ was the top lesson from the recent financial crisis.” -Bernanke

o Many countries found their government debt soaring because of the overuse of fiscal stimulus.

o Eurozone countries such as Greece, Ireland, Italy, Portugal and Spain (hereafter GIIPS) required bailout to avoid default of sovereign debt.

.

Introduction (cont.)• Tri-lemma: Main contributing factor for the

GIIPS sovereign debt crisiso By joining the Eurozone, GIIPS gave up the monetary

policy power, and had to over-extend fiscal policy tools to respond to the global financial crisis, resulting in sharp rises in government deficits and debts.

o Greece, Italy, Portugal: Overburdened by social insurance expenditures, the governments’ fiscal conditions were already shaky before the global financial crisis.

o Ireland and Spain: Government fiscal conditions were relatively sound. Trouble came from asset bubbles right before the global financial crisis.

5

Government Debt and Budget Balance

　 2007 2008 2009 2010 2011 Average2009-10

% GDP Govt Debt

Surplus/Deficit Surplus/Deficit Govt

DebtSurplu

s/Deficit

Surplus/Deficit

Greece 105.4 -6.7 -9.7 -15.6 -10.6 160.8 -9.2 -13.1

Ireland 24.8 0.1 -7.3 -14.2 -31.3 105.0 -9.9 -22.8

Italy 103.1 -1.5 -2.7 -5.4 -4.5 120.1 -3.9 -4.9 Portugal 68.3 -3.2 -3.7 -10.2 -9.8 106.8 -4.0 -10.0 Spain 36.3 1.9 -4.2 -11.2 -9.3 68.5 -8.5 -10.3 Japan 183.0 -2.1 -4.1 -10.4 -9.4 229.8 -10.1 -9.9 US 67.2 -2.7 -6.7 -13.0 -10.5 102.9 -9.6 -11.8 Taiwan 33.3 -1.4 -2.2 -5.2 -4.1 40.8 -4.3 -4.6

Introduction (cont.)• IMF’s estimate (GFSR 10/2012)：

o The total amount of GIIPS sovereign debt was USD 4.64 trillion as of 2011

oGovernment demand for funds would be USD 1.07 trillion and USD 880.5 billion, respectively, for 2012 and 2013.

• Despite the bailout packages and the austerity programs, Eurozone debt crisis will take 3 to 5 years to recover. During the course, the crisis could turn out of control because of the “game of chicken” played by the relevant parties.

Introduction (cont.)• The proposed “fiscal union” and ‘bank

alliance”, if implemented, would turn the Eurozone into a United Economic States of Europe. However, unlike the US, it lacks a democratic mechanism to balance the diverse interests of its members. Its success will depend on the willingness of the wealthy members to share resources with their less wealthy members, but not necessarily on the participation of England.

Effects on the Taiwan Economy• Direct Exposure: Taiwan's direct exposure to Euro debt

was minimum - around USD 1.3 billion at the end of 2010.

• Significant wealth effects of changes in exchange rates and international asset prices on Taiwan’s holdings of domestic assets and international investment position. o Taiwan maintains a large annual excess saving, amounting

to an average of 9.5% of its GDP (TWD 1.23trillion or USD 41 billion in 2011).

o As of 2011, Taiwan held an international investment position of USD 1.18 trillion (fifth in the world).

• Trade effect : Sovereign debt crisis caused world economic slowdown and thereby slowdown in Taiwan’s exports and economic growth.

Effects on the Taiwan Economy (cont.) Worries about the Euro crisis and the US QE

policy together forced capital (hot money) to flow to Asia, causing fluctuations in the currency values and foreign exchange reserves in Asian countries.

The value of the Taiwan dollar in terms of the USD went up by 11% from July 2010 until July 2011.

Greater volatility in Taiwan’s foreign exchange reserves: Compounded by Taiwan’s lowering the inheritance tax, which induced Taishan to remit money back to Taiwan).

Effects on Asset Markets: Stock and housing markets

Currency Value in terms of USD (2010M7=100)

2008

M01

2008

M03

2008

M05

2008

M07

2008

M09

2008

M11

2009

M01

2009

M03

2009

M05

2009

M07

2009

M09

2009

M11

2010

M01

2010

M03

2010

M05

2010

M07

2010

M09

2010

M11

2011

M01

2011

M03

2011

M05

2011

M07

2011

M09

2011

M11

2012

M01

2012

M03

2012

M05

2012

M07

2012

M0980.000

85.000

90.000

95.000

100.000

105.000

110.000

115.000

120.000

125.000

130.000

新台幣人民幣韓元

2011M7

2010/8/4

Exchange Rate and Change in FX Reserves: Taiwan

2008

M01

2008

M03

2008

M05

2008

M07

2008

M09

2008

M11

2009

M01

2009

M03

2009

M05

2009

M07

2009

M09

2009

M11

2010

M01

2010

M03

2010

M05

2010

M07

2010

M09

2010

M11

2011

M01

2011

M03

2011

M05

2011

M07

2011

M09

2011

M11

2012

M01

2012

M03

2012

M05

2012

M07

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

80

85

90

95

100

105

110

115

Change in FX Reserves

Value of TWD (Index)

2011M5

Capital Flows

2008

Q1

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

-20000

-15000

-10000

-5000

0

5000

10000

Financial Acct

Net Port Invest

Inflow

Outflow

Stock Markets

2008

M01

2008

M03

2008

M05

2008

M07

2008

M09

2008

M11

2009

M01

2009

M03

2009

M05

2009

M07

2009

M09

2009

M11

2010

M01

2010

M03

2010

M05

2010

M07

2010

M09

2010

M11

2011

M01

2011

M03

2011

M05

2011

M07

2011

M09

2011

M11

2012

M01

2012

M03

2012

M05

2012

M07

2012

M090.00

50.00

100.00

150.00

200.00

250.00

Taiex

Shanghai

DJ

2011M9

Exchange and Asset Markets (2010M7=100)

200

200

200

200

200

200

200

200

200

200

200

200

201

201

201

201

201

201

201

201

201

201

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201

201

201

201

201

201

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

Taiex

TWD

Housing Price

2011M7

Taiex, Fx, HS price and RE loan (%yoy)

2008

M01

2008

M03

2008

M05

2008

M07

2008

M09

2008

M11

2009

M01

2009

M03

2009

M05

2009

M07

2009

M09

2009

M11

2010

M01

2010

M03

2010

M05

2010

M07

2010

M09

2010

M11

2011

M01

2011

M03

2011

M05

2011

M07

2011

M09

2011

M11

2012

M01

2012

M03

2012

M05

2012

M07

2012

M09

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

Taiex

TWD

Housing Price

Ttl RE Ln

2011M5

Effects on the Taiwan Economy (cont.) Capital Flow Effect: Outflow of long-term porfolio

Investment and inflow of short-term porfolio investment.

Trade Effect: Europe is Taiwan’s fourth largest export market, accounting for 10% of its total exports. Taiwan also has substantial exports to Europe indirectly through Mainland China, as many of Chinese exports to Europe use Taiwan-made parts. (Europe is the largest trading partner of China, account for 20% of its total exports).

The growth rate of Taiwan’s exports to Europe declined from a peak of 49% in 2010M5 to double digit negative growth rate in 2012.

The growth rate of total exports followed a similar pattern.

Taiwan’s Exports to Europe

2008

M01

2008

M03

2008

M05

2008

M07

2008

M09

2008

M11

2009

M01

2009

M03

2009

M05

2009

M07

2009

M09

2009

M11

2010

M01

2010

M03

2010

M05

2010

M07

2010

M09

2010

M11

2011

M01

2011

M03

2011

M05

2011

M07

2011

M09

2011

M11

2012

M01

2012

M03

2012

M05

2012

M07

2012

M09

-60

-40

-20

0

20

40

60

80

100

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

% of Total (Right)

%yoy

年增率 (%)

Effects on the Taiwan Economy (cont.) Decline in Taiwan‘s economic growth rate:

Because of the decline in exports. The growth rate for 2012 was forcasted to be 4.5%

originally before the start of the year, but has been revised downward nine times by the DGBAS to 1.05% as of 11/18/2012. It will be a challenge for the economy to maintain the growth rate at 1% or higher.

Effects on the Taiwan Economy (cont.)

• Since the global financial crisis, Taiwan’s growth rate has been more volatile than its competitors: A result of Taiwan’s heavy dependence on exports and on the ICT sector.o Exports account for 75% of aggregate GDP.o The GDP of the ICT sector accounts for 53% of the

manufacturing GDP.o ICT exports account for 40% of total exports.

Aggregate & Sectorial Growth Rates

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-10

-5

0

5

10

15

20

25

30

35

GDP

Manufacturing

ICT Sector

Lessons from and Responses to the Eurozone Debt crisis• Importance of sound fiscal condition: 7uu

Financial soundness of social insurance programs must be maintained.o Excluding social insurance programs, the government

debt was 40.8%, and fiscal deficits were 3.38%, of its GDP as of 2011. The European Stability and Growth Pact requires that the government debt be less than 60%, and government fiscal deficits be less than 3% of GDP.

o Because of rapidly aging of population, social insurance programs are under financial stress. The Labor Insurance Program is expect to run out funds by 2027.

Government Debt and Deficits

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120123456789

10Govt budget deficits

Govt budget deficits

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012253035404550556065

Govt gross debt

Govt gross debt

Population Aging

Year

Population Age Structure(%)

Life Expectancy at Birth

0-14 15-64 65+ Male Female

1970 39.7 57.4 2.9 66.7 71.6

2000 21.1 70.3 8.8 73.8 79.6

2010 15.8 73.5 10.7 76.1 82.7

2050 9.2 52.9 37.9 82.4 88.5

Lessons from and Responses to the Eurozone Debt Crisis (cont.)

• Containment of asset bubbles.o The central bank has been using selective

credit controls to contain housing bubble.oNew measures: Require reporting of actual

transaction prices in housing transactions.

Lessons from and Responses to the Eurozone Debt Crisis (cont.)

• Balance between the efficiency of capital allocation and potential instability due to rapid capital flows.o Taiwan has not imposed a tax on short-term capital

flowso The central bank keeps a closed eye on some 20

FINIs which have frequently engaged in large volumes of foreign exchange transactions.

Lessons from and Responses to the Eurozone Debt Crisis (cont.)

• Balance between scale economy and systemic risk. Scale economy is important for both ICT and financial-service sector to stay competitive in global markets. Consolidation is thus required. o Maintenance of good corporate governance is

important for avoiding “too large to fail”- Dodd-Franko Discouragement of leveraging of corporate

investment (Particularly ICT investment)o Internationalization of stock markets to achieve risk

sharing in ICT

World Ranking of BanksRanking Bank Net worth

(TW$B)Assets

(TW$B)Assets Deposits

(TW$B)Loans (TW$B)(US$B)

1 J P Morgan Chase 2,117

2 HSBC 2,468 7 ICBC 1,724

17China Construction Bank

1,408

24 Bank of China 1,278

25China Agricultural Bank

1,298

132 Bank of Taiwan 245 3,772 131 3,189 2,079

160Taiwan Cooperative Bank

118 2,701 94 2,180 1,783

178 Mega Bank 158 2,203 76 1,545 1,329181 Taiwan Land 106 2,185 80 1,902 1,701

Concluding Remarks

• In a volatile world economy, the government must build and enhance capacity to monitor and respond to changing macroeconomic conditions.

• Maintain fiscal health and avoid bubbles in asset market.

• Maintain balance between scale economy and control of systemic risk.

• Maintain long-term capital mobility while containing rapid short-term capital flows.

Thank You !!!