the financial crisis and emerging europe: what happened ... · seminar with romanian trade unions ....

The Financial Crisis and Emerging Europe: What Happened and What’s Next?

Seminar with Romanian Trade Unions Bucharest, November 2, 2010

Mark Allen Senior IMF Resident Representative for Central

and Eastern Europe

III. Outlook for the Region

II. Why was Emerging Europe badly hit?

I. Course of the crisis

0

100

200

300

400

500

600

United States Euro area United Kingdom

The crisis started in the USA financial sector.

Source: Bloomberg

Bank CDS spreads (basis points)

Bear Stearns Lehman Turning point

…and rapidly spread to other sectors.

Advanced Sovereigns

Prime RMBS

Corporate credit

Commercial MBS

Financial Institution

Money markets

Jan-07

Source: Global Financial Stability Report, October 2010

Jan-10 Jan-08 Jan-09

Subprime RMBS

Heat map

Emerging Markets

The financial shock caused a collapse in world trade…

Value of exports (percent change, year-on-year)

Source: International Financial Statistics -40

-30

-20

-10

0

10

20

30

40

50

Advanced Economies

Emer.& Develop. Eco.

World

…and in global output.

Source: World Economic Outlook, October 2010

Change in real GDP (Year on year)

-6

-4

-2

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Euro Area Japan United States Emer.& Develop. Eco. World

0

1

2

3

4

5

6 EuroArea UK USA Japan Switzerland

Central banks lowered interest rates to ease conditions. Policy rates (Percent)

Source: Bloomberg

0

50

100

150

200

250

300

350

400 Euro Area UK USA Japan China

…and then provided unconventional support. Total central bank assets (Jan-07 = 100)

Source: Bloomberg

Banks have recognized losses and recapitalized.

Capital raising

0

1

2

3

4

5

6

7

8

0

500

1000

1500

2000

2500

Total United States

Euro Area

United Kingdom

Other Mature Europe

Asia

Expected additional writedowns / loss provisions (2007q2-2010q2) Realized writedowns / loss provisions (2010q3-2010q4) Implied cumulative loss rate (right scale)

(percent) (billions USD)

Public Debt (Percentage of GDP)


Advanced country public finances have weakened…

0

20

40

60

80

100

120

2000 2002 2004 2006 2008 2010 2012 2014

Advanced Economies

Emer.& Develop. Eco.

…and doubts about government solvency have grown…

0

50

100

150

200

250

300

USA Germany Italy UK Japan

Source: Bloomberg

I. Financial crisis

buildup

II. Systemic outbreak

III. Systemic response

IV. Sovereign debt crisis

The Four Phases of the Crisis (10-yr sovereign swap spreads, percent)

…although the deterioration was caused by recession.

G-20 Advanced Economies: Increase in Public Debt, 2008-15 (Total increase: 37 percentage points of GDP; 2009 PPP weighted GDP)

Revenue loss 18

Fiscal stimulus 4.5

Financial sector support

3.2

Lending operations

4.1

(2008 – 2015) Interest-growth dynamics (r-g)

7.2

Sour

ce: W

orld

Eco

nom

ic O

utlo

ok, A

pril

2010

; Sta

ff e

stim

ates

Global imbalances still need correction…

-1500

-1000

-500

0

500

1000

1500

2000

2500 Other Developed Economies Other Euro Area Other Emerging Economies United States Japan Germany China World

Source: World Economic Outlook, April 2010

Current Account deficits (Billions of USD)

…and not all currency movements are helping.

US dollar exchange rates (Jan-2005 = 100) 50

60

70

80

90

100

110

120

130

140

150 2005 2006 2007 2008 2009 2010

Euro Real (Brazil) Renminbi (China) Rupee (India) Yen (Japan) Won (Korea)

Emerging Europe was among the fastest growing regions…

-6

-4

-2

0

2

4

6

8

10

China & India

Emerging Europe

Sub-Saharan Africa

Developing Asia

ASEAN-5 ME & NA Western Hemisphere

1995-2002 2003-2007 1995-2007


Real GDP per capita growth (average annual growth rates)

-6

-4

-2

0

2

4

6

8

10

China & India

Emerging Europe

Sub-Saharan Africa

Developing Asia

ASEAN-5 ME & NA Western Hemisphere

1995-2002 2003-2007 2008-2009 1995-2007


Real GDP per capita growth (average annual growth rates)

…but was most affected by crisis.

Growth in Emerging Europe was fueled by a boom in domestic demand…

Source: IMF, International Financial Statistics and World Economic Outlook database.

0

2

4

6

8

10

12

14

0 2 4 6 8 10 12 14

1 As t

he b

oom

in th

e Balt

ic sta

tes e

nded

in 2

007,

dat

a for

the B

altics

refe

r to

2002

–07.

Real

GD

P gr

owth

, 200

3-20

081

Real domestic demand growth, 2003-20081

Hungary

B&H Albania

Croatia Macedonia

Serbia

Latvia Lithuania Estonia

Ukraine Romania

Bulgaria

Average

…which was in turn driven by domestic credit…

1 As t

he b

oom

in th

e Balt

ic sta

tes e

nded

in 2

007,

dat

a for

the B

altics

refe

r to

2002

–07.

Real

dom

estic

dem

and

grow

th, 2

003-

2008

1

Real private sector credit growth, 2003-20081


Albania

Belarus

B&H

Bulgaria

Croatia

Czech Republic

Estonia

Hungary

Latvia Lithuania

Macedonia, FYR

Moldova

Montenegro

Poland

Romania

Russia

Serbia Slovak Republic Turkey

Ukraine

0

2

4

6

8

10

12

14

0 20 40 60 80

…financed by bank inflows...

Albania

Belarus

B&H

Bulgaria

Croatia

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Poland Romania

Russia Turkey

Ukraine

Slovak Republic

0

10

20

30

40

50

60

-10 0 10 20 30 40

1 As t

he b

oom

in th

e Balt

ic sta

tes e

nded

in 2

007,

dat

a for

the B

altics

refe

r to

2002

–07.

Cha

nge

in p

rivat

e se

ctor

cre

dit t

o G

DP,

200

3-20

081

Change in external position of BIS-reporting banks, 2003-20081


…and other capital inflows.

-50

0

50

100

150

200

250

300 Portfolio FDI Other Total


1 As t

he b

oom

in th

e Balt

ic sta

tes e

nded

in 2

007,

dat

a for

the B

altics

refe

r to

2002

–07.

Cumulative Net Capital Inflows, 2003-20081 (percent of 2003 GDP)

This lead to increased inflation…

0

5

10

15

20

25

30 June-08 January-06

Consumer Price Inflation (annual percent change)

Source: Haver Analytics

…and asset price bubbles.

0

50

100

150

200

250

300

350

Change in Real Estate Prices, 2003-20081 (percentage change)

Source: Haver Analytics; country statistical offices

1 As t

he b

oom

in th

e Balt

ic sta

tes e

nded

in 2

007,

dat

a for

the B

altics

refe

r to

2002

–07.

Foreign exchange lending become popular…

0

20

40

60

80

100 Foreign currency indexed Foreign currency National currency

Sources: National authorities; and IMF, International Financial Statistics.

Total Private Sector Credit by Currency, 2008 (percentage of GDP)

…and foreign currency mortgages reached high levels.

0

5

10

15

20

25

30

35

40

Foreign Currency Loans to Households, 2008 (Percentage of GDP)

Source: IMF, International Financial Statistics

Bank inflows suddenly stopped…

Source: BIS

External positions of reporting banks (USD billions, estimated exchange rate adjusted changes)

-30

-20

-10

0

10

20

30

40

50 Other Emerging Europe Ukraine SEE-Non-EU SEE-EU Baltics CEE3

Excludes: Russia, Turkey

…and exports shrank…

Source: Eurostat, Haver Analytics, and IMF staff calculations

50

60

70

80

90

100

110

120

Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10

Bulgaria Croatia Hungary Poland Romania Russia Ukraine

Real Exports (Seasonally adjusted, index Sep-08=100)

…and consumption had to adjust.

Source: Eurostat, Haver Analytics, and IMF staff calculations

85

90

95

100

105

Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10

Bulgaria Croatia Hungary Poland Romania Russia Ukraine

Real Private Consumption (Seasonally adjusted, index Sep-08=100)

Output fell as consumption fell.

-15

-10

-5

0

5

10

2005 2006 2007 2008 2009 2010

Bulgaria Hungary Poland Romania Serbia, Republic of Ukraine

GDP real growth (year on year)


Fiscal expenditures kept pace with booming revenues…

Albania

Belarus

B&H

Bulgaria

Croatia

Estonia

Hungary

Kosovo

Latvia Lithuania

Macedonia, FYR

Moldova

Montenegro

Poland

Romania

Russia

Serbia

Turkey

Ukraine

0

20

40

60

80

100

120

140

0 20 40 60 80 100 120 140

1 As t

he b

oom

in th

e Balt

ic sta

tes e

nded

in 2

007,

dat

a for

the B

altics

refe

r to

2002

–07.

Real

exp

endi

ture

gro

wth

, 200

3-20

081

Real revenue growth, 2003-20081

Source: IMF, World Economic Outlook, October 2010

45 degree line

…until the recession led to wider deficits.

Source: World Economic Outlook, June 2010

Change in Fiscal Balance 2008-2010 (percent of GDP)

-12%

-9%

-6%

-3%

0%

3%

6%

9% Change in Expenditures 2008-2010 Change in Revenues 2008-2010 Change in Fiscal Balance 2008-2010 Projected Fiscal Balance 2010

The race was not to the swift

Hungary

Kosovo

Croatia

Macedonia, FYR

Czech Republic

Poland

B&H

Turkey Moldova

Albania

Bulgaria

Serbia

Ukraine Romania

Montenegro

Russia

Slovak Republic

Estonia

Lithuania

Latvia

1

2

3

4

5

6

2 4 6 8 10

1 As t

he b

oom

in th

e Balt

ic sta

tes e

nded

in 2

007,

dat

a for

the B

altics

refe

r to

2002

–07.

Aver

age

real

GD

P gr

owth

, 200

3-20

13

Average real GDP growth, 2003-20081

Source: IMF, World Economic Outlook and IMF staff calculations.

Emerging Europe is relatively open to trade…

0 20 40 60 80

100 120 140 160 180

Import and Export as a share of GDP (2007, percent)

Source: World Economic Outlook

…and particularly dependent on eurozone conditions.

0 5

10 15 20 25 30 35 40 45 50

Merchandise exports to Euro Area as a share of GDP (2007-2009 average, percent)

Source: Direction of Trade Statistics; World Economic Outlook, April 2010

- EU Members - Euro Members - Others

Emerging Europe represents small part of EU economy

Each hexagon represents 5.7 billion euro of GDP. Approximately the size of the economy of Malta.

Countries with deepest recessions are recovering slower…

Aver

age

GD

P gr

owth

, 201

0-20

11

GDP growth in 2009

Source: IMF, World Economic Outlook

Albania

Belarus

B&H Bulgaria

Croatia

Estonia

Hungary

Kosovo

Latvia Lithuania Macedonia

Moldova

Montenegro

Poland

Romania

Serbia

-1

0

1

2

3

4

5

6

7

8

-20 -15 -10 -5 0 5 10

…but growth has resumed almost everywhere…

-15

-10

-5

0

5

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


GDP real growth (year on year)


…although several years’ progress has been lost.

95 100 105 110 115 120 125 130 135 140 145 150 155

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bulgaria

Hungary

Poland

Romania

Serbia, Republic of

Ukraine

Estimated 2010 difference from 2008 GDP level: - 5.0% - 5.8%

- 8.9% - 1.5%

- 12.0%

+5.1%

GDP volume (2005 = 100)


Industrial production is recovering…

Source: International Financial Statistics

Industrial production (Year on year change)

70

80

90

100

110

120

130

140

2008 2009 2010

Czech Rep. Poland Slovakia Czech Republic Poland Slovak Republic Hungary, Romania Hungary Romania Croatia, Bulgaria, Serbia Serbia, Republic of Croatia Bulgaria

…making improvement in labor market possible…

Unemployment rate

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015



…and many countries are becoming more competitive.

Source: Haver Analytics; EMED Emerging EMEA; and IMF staff calculations.

-10

-5

0

5

10

15

20 Li

thua

nia

Hun

gary

Est

onia

Cro

atia

B&H

Mac

edon

ia

Pola

nd

Rom

ania

Serb

ia

Ukr

aine

Bulg

aria

January–September 2008

January–June 2010

Gross Real Wage Growth (average of the year-over-year growth for the months, in percent)

Fiscal deficits are being corrected…


Fiscal Deficit (percentage of GDP)

-10

-8

-6

-4

-2

0

2

4

6

2005 2006 2007 2008 2009 2010 2011 2012


…but debt levels have increased...


Fiscal Debt (percentage of GDP)

0

10

20

30

40

50

60

70

80

90

100

2005 2006 2007 2008 2009 2010 2011 2012


…although sovereign debt is lower than in GIIPS.

Sovereign Debt to GDP (percent)

Source: World Economic Outlook, April 2010

0

20

40

60

80

100

120

140

160

2003 2005 2007 2009 2011 2013

Czech Republic Hungary Romania Slovak Republic Croatia Serbia, Republic of Ukraine Greece Ireland Italy Portugal Spain Austria

EU NMS Other Emerging Europe GIIPS

Spreads in Emerging Europe have fallen.

Source: Bloomberg

5yr CDS spreads (basis points)

0

1000

2000

3000

4000

5000

6000

2005 2006 2007 2008

Bulgaria Hungary Poland Romania Ukraine

Spreads in Emerging Europe have fallen.

Source: Bloomberg

5yr CDS spreads (basis points)

0

1000

2000

3000

4000

5000

6000

2005 2006 2007 2008

Bulgaria Hungary Poland Romania Ukraine

0

200

400

600

800

1000

1200

1400

1600

1800

Capital inflows are less buoyant…

-20

-10

0

10

20

30

40

50

2005 2006 2007 2008 2009 2010

Bulgaria Hungary Poland Romania Serbia Ukraine

Total


Inflows to Emerging Europe (billions USD)

-20

-10

0

10

20

30

40

50

2005 2006 2007 2008 2009 2010

Direct investment Portfolio investment Other

Total


Inflows to Emerging Europe (billions USD)

Capital inflows are less buoyant…

…as part of post-crisis deleveraging.

Source: BIS; IMF, International Financial Statistics

0 10 20 30 40 50 60 70 80 90

100

t-20 t-15 t-10 t-5 t t+5 t+10 t+15 t+20 t+25 t+30

Asia (Sep 1997)

Emerging Europe (Jun 2008)

Latin America (Dec 1983)

Foreign Banks Exposure in relation to GDP (peak = 100)

Emerging Europe credit growth is still tied to cross-border flows.

Cross-border bank deleveraging (peak = 100)

Hungary Russia

Ukraine

Estonia Lithuania

Czech

Romania

Latvia

Poland

Croatia

Bulgaria

Turkey

-12

-8

-4

0

4

8

-10 -5 0 5 10

BIS

Cro

ss-B

orde

r Ban

k Fl

ows,

20

09Q

3 to

201

0Q1

(per

cent

of

GD

P)

Real Growth in Credit to the Private Sector, 2009Q3 to 2010Q1 (percent)

Central and Eastern Europe Emerging markets and other countries

NPLs are peaking.


0

5

10

15

20

25

30

35

40

45

2005 2006 2007 2008 2009 2010q1

Bulgaria Hungary

Poland Romania

Serbia Ukraine

Non-performing loans (As a percent of total loans)

…and credit growth remains very restrained.

Private Credit Growth (percent, year-on-year)


-20

0

20

40

60

80

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10


Sovereign creditworthiness directly affects that of banks…

Percent change in sovereign CDS

Cha

nge

in lo

cal s

enio

r fin

anci

al C

DS

Source: Bloomberg

0

100

200

300

400

500

-100 0 100 200 300 400 500 600

Greece Portugal

Italy Spain

Belgium Austria Portugal Spain

Greece Ireland

October 2009 to June 2010 October 2009 to February 2010

…and a feedback loop ties sovereign strains to banking system

SOVEREIGN

SOVEREIGN

BANKS

BANKS

Foreign

Domestic

A. Mark to market fall in value of govt. bonds held by local banks

B. Increase in bank funding cost

D. Mark to market fall in value of govt. bonds held by foreign banks

C. Erosion in potential for official support

F. Contagion channels (A,B, & C as above)

G. Rise in Counter-party risk

H. Withdrawal of funding for risky banks

E. Similar Sovereign come under pressure

I. Increase in contingent liabilities of govt.

I. Increase in contingent liabilities of govt.

Thank you

the financial crisis and emerging europe: what happened ... · seminar with romanian trade unions ....

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