International International MonetaryMonetary FundFundJune 9, 2012June 9, 2012
Euro Area Crisis: Still in the Danger ZoneEuro Area Crisis: Still in the Danger Zone*/*/
Emil Stavrev Emil Stavrev Research DepartmentResearch Departmentpp
((*/*/ Views expressed in this presentation are those of the author and do not necessarily represent those of the IMF or IMF Policy)Views expressed in this presentation are those of the author and do not necessarily represent those of the IMF or IMF Policy)
OverviewOverview
Recent Developments: Still in the Danger ZoneRecent Developments: Still in the Danger ZoneRecent Developments: Still in the Danger ZoneRecent Developments: Still in the Danger Zone
Financial Stress, Bank Deleveraging, and SpilloversFinancial Stress, Bank Deleveraging, and SpilloversFinancial Stress, Bank Deleveraging, and SpilloversFinancial Stress, Bank Deleveraging, and Spillovers
IntraIntra--Euro Area ImbalancesEuro Area ImbalancesIntraIntra--Euro Area ImbalancesEuro Area Imbalances
Policies to Resolve the Crisis and Build a Stronger EMUPolicies to Resolve the Crisis and Build a Stronger EMUPolicies to Resolve the Crisis and Build a Stronger EMUPolicies to Resolve the Crisis and Build a Stronger EMUPolicies to Resolve the Crisis and Build a Stronger EMUPolicies to Resolve the Crisis and Build a Stronger EMUPolicies to Resolve the Crisis and Build a Stronger EMUPolicies to Resolve the Crisis and Build a Stronger EMU
1
Financial Stress in the Euro AreaFinancial Stress in the Euro Area
800500
European Financial CDS (LHS) High Yield Euro-Area Sov. Bond Spreads (RHS)
Key European SpreadsKey European Spreads(basis points)(basis points)
Lehman Greeceprogram
IrelandProgram
ECB LTRO
Dec 2011
600
700
400
Dec 2011
300
400
500
200
300
100
200
300
100
0008 09 10 11 12
Source: IMF, Global Financial Stability Report.
6/4
2
Bond Yields in the Periphery Remain ElevatedBond Yields in the Periphery Remain ElevatedSize of Euro Area Government Bond MarketsSize of Euro Area Government Bond Markets
IrelandGreece IrelandGreece IrelandGreeceN th l d
(percent of total euro(percent of total euro--area government debt)area government debt)
Average sovereign CDS spreads: Over 400 basis points 200-400 basis points 150-200 basis points Under 150 basis points
G G
Portugal2%
1%5%Netherlands5%
1%4%Netherlands5% Portugal
2%
1%4%Netherlands5% Portugal
2%Finland
1%Finland
1%Finland
1%
Italy26%
Italy25%
Italy25%
Germany22%
Germany23%
Germany23%
Spain9%
Spain10%
Spain10%
France21% France
21%France
21%
Belgium5%
Belgium5%
Belgium5%
Austria3% Austria
3%Austria
3%
April 2010April 2010 November 2011November 2011 February 2012February 20125%5%5%
Sources: Bank for International Settlements; Bloomberg L.P.; and IMF staff estimates.3
European Bank Deleveraging Has ContinuedEuropean Bank Deleveraging Has Continued
Evolution of Adjusted Foreign Claims Evolution of Adjusted Foreign Claims during 2011Q4 2/during 2011Q4 2/(by borrower region)
40
Euro area U K U S
Bank Leverage 1/Bank Leverage 1/(adjusted tangible assets to Tier 1 common capital)
All Countries EuropeWestern
Hemisphere Asia & Pacific
30
35
Euro area U.K. U.S.
-1
0p p
20
25
-3
-2
Percentage change
As percent of borrowers' GDP
10
15
2011Q4 -5
-4As percent of available credit
Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12
4
Sources: SNL Financial; Bank for International Settlements; and IMF staff estimates.1/ Tangible assets are adjusted on best-endeavor basis to adjust for accounting differences.2/ Data adjusted for exchange rate variations and breaks.
-6
Lending Standards Tightening while Credit DeceleratesLending Standards Tightening while Credit Decelerates
70Balance sheet constraints
Contributions to Euro Area Lending Contributions to Euro Area Lending Conditions for Companies 1/Conditions for Companies 1/(net percentage; balance of respondents)(net percentage; balance of respondents)
Credit Growth to the NonCredit Growth to the Non--Financial Financial Private SectorPrivate Sector(percent; year(percent; year--onon--year)year)
30France Germany Italy
40
50
60 Cyclical factors
Competition
Overall15
20
25 Spain Euro-Area
10
20
30
0
5
10
-10
0
07 08 09 10 11 12
12Q1 -10
-5
07 08 09 10 11 12Apr. 12
Sources: European Central Bank; Haver Analytics; and IMF staff calculationsSources: European Central Bank; Haver Analytics; and IMF staff calculations..1/ Chart based on factors cited by lending conditions survey respondents. Balance sheet constraints include capital, access 1/ Chart based on factors cited by lending conditions survey respondents. Balance sheet constraints include capital, access to financing, liquidity position and collateral needs. Cyclical factors include general economic activity and industry outlooto financing, liquidity position and collateral needs. Cyclical factors include general economic activity and industry outlook.k.
5
Adverse Feedback Loops in EuropeAdverse Feedback Loops in Europe
Lower growthLower growthMore More ConsolidationConsolidation
Deleveraging Deleveraging &&Consolidation Consolidation
or stabilizers or stabilizers held backheld back
Less bank Less bank lendinglending
Worsen fiscal Worsen fiscal balancebalance
Lower bank Lower bank asset qualityasset quality
PublicPublicSupport NeedsSupport Needs
FiscalFiscal FinancialFinancial
Sovereign risks Sovereign risks increaseincrease
6
Potential Global Potential Global Spillovers from Euro Crisis ScenarioSpillovers from Euro Crisis Scenario
7
G t B d S dG t B d S d
IntraIntra--Euro Area Imbalances: Euro Area Imbalances: Sovereign Risk Spreads Compressed Sharply after EMU InceptionSovereign Risk Spreads Compressed Sharply after EMU Inception
Government Bond SpreadsGovernment Bond Spreads(10-year yield spreads over German bunds; basis points)
3500
4000
1750
2000France
Italy
2500
3000
3500
1250
1500
1750 Italy
Ireland
Portugal
Spain
1000
1500
2000
500
750
1000 Greece (RHS)
0
500
0
250
6/4-500-250
94 96 98 00 02 04 06 08 10 12
Source: Bloomberg L.P.
6/4
8
Imbalances Have Compressed SomewhatImbalances Have Compressed SomewhatBut FBut Further Rebalancing is Still Neededurther Rebalancing is Still Needed
4.0EA surplus excl. Ger GermanyGIIPS EA deficit excl. GIIPSEuro area
Current Account Balances 1/Current Account Balances 1/(percent of world GDP)(percent of world GDP)
115
Euro area: Growth and Recovery Euro area: Growth and Recovery from the Crisis 1/from the Crisis 1/((2007=100; real GDP index)
2.0
3.0
Euro area
105
110 EA Surplus
EA Deficit
0.0
1.0
95
100
-3.0
-2.0
-1.0
80
85
90
3.099 01 03 05 07 09 11
Source: IMF, World Economic Outlook.
9
8099 01 03 05 07 09 11 13 15 17Source: IMF staff estimates.1/ Euro area external surplus countries: Austria, Belgium, Finland, Germany, Luxembourg, Netherlands. Euro area external deficit countries: Greece, Ireland, Italy, Portugal, Spain.
Target 2 Imbalances Widened Following the CrisisTarget 2 Imbalances Widened Following the Crisis
Claims of euro area NCBs against the ECBClaims of euro area NCBs against the ECB(billions of euros)
600Germany Greece
Claims of euro area NCBs against the ECBClaims of euro area NCBs against the ECB(percent of GDP)
20
30Germany Greece
300
400
500 Italy Portugal
Spain
0
10
20Italy Portugal
Spain
100
200
-30
-20
-10
-200
-100
0
Dec. 11 -60
-50
-40
Dec. 11
10
Source: National central banks.
99 00 01 02 03 04 05 06 07 08 09 10 11 99 00 01 02 03 04 05 06 07 08 09 10 11
Efforts on Several Fronts are Needed to Build Efforts on Several Fronts are Needed to Build a Stronger a Stronger EMUEMU
Resolute crisis management and containmentResolute crisis management and containment
Moving toward a common financial stability frameworkMoving toward a common financial stability framework
Stronger fiscal integration, complemented with exStronger fiscal integration, complemented with ex--ante risk sharingante risk sharing
Institutional monitoring and constraints on excessive imbalancesInstitutional monitoring and constraints on excessive imbalances
Growth and EmploymentGrowth and Employment
11