maja kadievska vojnovik vice-governor national bank of the republic of macedonia
TRANSCRIPT
THE LESSONS/ POLICY RESPONSES AND THE FUTURE OF THE EURO
Maja Kadievska VojnovikVice-governor
National Bank of the Republic of Macedonia
Outline:
The lessons from the Eurozone (EZ) crisis /policy responses
1.Growth model of GIIPS2. Problems in the structure of the EZ3. Mispricing of risk by capital markets4. Crisis prevention and resolution mechanism
needs to be in place before the next crisis5. Surveillance and monitoring of regional financial
markets should be strengthened6. Banks need to be recapitalized quickly after crisis The future of the Euro
1. Growth model of GIIPS
The growth model of GIIPS (Greece, Ireland, Italy, Portugal and Spain) based on:
Large external imbalances -large CAD financed by debt-creating flows;
The falling labor productivity and rising labor costs;
Lavish social security systems with inefficient governments - high and permanent deficits
is NOT SUSTAINABLE.Solution: Austerity Programs and Structural
Reforms!!!
1. Growth Model -Large wage increases in excess of productivity
growth/rising ULC
1990
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60
80
100
120Unit Labor Costs (index base year 2005=100), 1990–2010
Greece Italy Spain Ireland German France
Source: OECD
1. Growth Model - The appreciation of
REER impaired export performance
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100
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120
Real Effective Exchange Rates Based on Relative Unit Labor Costs, 1990Q1–2011Q1
Greece Italy Spain Por-tugal Ireland German France
Source: IMF
1. Growth Model- Worsen competitiveness vis-à-vis the core countries, in particular
Germany, caused large CAD
199019911992199319941995199619971998199920002001200220032004200520062007200820092010-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00 Current Account % of GDP
Greece
Spain
Portugal
Ireland
Italy
Germany
France
Source: IMF
1. Growth Model -Global financial crisis of 2008–2009, spilled over into
a sovereign debt in early 2010
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-30
-25
-20
-15
-10
-5
0
5
10 Budget deficit as % GDP
Greece Italy Spain Portugal Ireland German France
Source: Eurostat
1. Growth Model -Government bailouts of banking systems contributed to an increase in already high public debt
levels
Greece Italy Spain Portugal Ireland Germany France0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0Public Debt as % of GDP
19952001
Source: Eurostat
A common monetary policy and currency without fiscal union, centralized budget authority or system of fiscal transfers across members to smooth out asymmetric shocks;
Solution: European Governance Reforms
In December 2011, announced a new "Fiscal compact“: Introduction of fiscal rules in national constitutions -the structural
deficit not exceed 0.5% of GDP; European Court of Justice (Luxembourg) will be responsible for the
proper transposition of this rule; Introduction of automatic sanctions for countries that violate the
rules of the Stability and Growth Pact (deficit ceiling of 3% and the debt ceiling of 60%)automatic sanctions (0.2% of GDP, blocking money from the Structural Funds);numerical benchmark for the debt (1/20 to reduce annual average calculated for three years);
2. Problems in the structure of the Eurozone
3. Mispricing of risk by capital markets
European monetary unification brought convergence of interest rates among EZ members, but the financial integration did not automatically lead to the efficient allocation of capital.
Solution: the risk assessment on country level
3. Mispricing of risk by capital markets -Since March 2010, the borrowing costs
for the GIIPS increased significantly
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10
15
20
25
30
35
40
10 Year Government Bond Yields, January 2007–January 2012
Greece
Italy
Spain
Portugal
Ireland
Germany
France
Source: Bloomberg
3. Mispricing of risk by capital markets The cost of insuring sovereign debt
against default soared
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3000
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6000
7000
8000
9000
10000Greece - Sovereign Credit Default Swaps, December
2007–January 2012
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Italy
Spain
Por-tugal
Ireland
German
France
Credit Rating by Countries 2007/2012
Greece Italy Spain Portugal Ireland German France
2007
Moody's A1 Aa2 Aaa Aa2 Aaa Aaa Aaa
S&P A A+ AAA AA- AAA AAA AAA
Fitch A AA- AAA AA AAA AAA AAA
2012
Moody's C A3 A3 Ba3 Ba1 Aaa Aaa
S&P SD BBB+ A BB BBB+ AAA AA+
Fitch B- A- A BB+ BBB+ AAA AAA
Source: Bloomberg
4. Crisis prevention and resolution mechanism needs to be in place before the next
crisisSolution:Temporary, three-year lending facility-
European Financial Stability Facility (EFSF), but more importantly - Permanent rescue fund, the European Stabilization Mechanism (ESM) in 2013.
In 2012, EFSF and ESM will overlap with total ceiling of 940 billions euro
Date agreedEuropean Financial Assistance
IMF- Financial Assistance
Total Financial Assistance
GREECE May 2010 € 80 billion € 30 billion € 110 billion
IRELAND December 2010 € 45 billion € 22.5 billion € 67.5 billion
PORTUGAL May 2011 € 52 billion € 26 billion € 78 billion
GREECE July 2011/ February 2012 € 130 billion € 130 billion
Financial Assistance from other EZ governments and IMF
Source: IMF
5. Surveillance and monitoring of regional financial markets should be strengthened
Solution: New supervisory framework: As from January 2011, the three European
supervisory authorities (ESAs) and a European Systemic Risk Board (ESRB) were established to replace the former supervisory committees:
European Banking Authority; European Securities and Markets Authority, European Insurance and Occupational
Pensions Authority.
6. Banks need to be recapitalized swiftly after crisis The 2008-2009 financial crisis had deepen the already
unsustainable fiscal positions; the sovereign debt crisis since the 2011 summer has triggered a dangerous feedback loop.
Solution :Consensus on banking package for restoring confidence
Guarantees on bank liabilities -to provide more direct
support for banks in accessing term funding (as essential part of the strategy to limit deleveraging actions);
The repetition of the 2008 experience with full national discretion in the setting-up of liquidity schemes may not provide a satisfactory solution under current market conditions. Therefore a truly coordinated approach at EU-level is needed regarding entry criteria, pricing and conditions.
Capitalisation of banks : Quantitative capital target of 9 % have to be attained by 30 June 2012, based on plans agreed with national supervisors and coordinated by EBA.
National supervisory authorities, under the auspices of the EBA, must ensure that banks’ plans to strengthen capital do not lead to excessive deleveraging
Financing of capital increase: Banks should first use private sources of capital, including through restructuring and conversion of debt to equity instruments.
Banks should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained.
If necessary, national governments should provide support , and if this support is not available, recapitalisation should be funded via a loan from the EFSF in the case of EZ countries.
Any form of public support, whether at a national or EU-level , will be subject to the conditionality
Country The major banks by assets size Germany Deutsche Bank AG Commerzbank AG DZ Bank AG
Moody'
s S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch200
7 Aaa AAA AAA Aa1 AA AA- Aa3 A A Aa3 A+ A+201
2 Aaa AAA AAA Aa3 A+ A+ A2 A A+ Aa3 AA- A+ France BNP Paribas SA Credit Agricole SA Societe Generale
Moody'
s S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch200
7 Aaa AAA AAA Aa1 AA+ AA Aa1 AA- AA Aa1 AA AA201
2 Aaa AA+ AAA Aa3 AA- A+ Aa3 A A+ A1 A A+
Spain Banco Santander SABanco Bilbao Vizcaya
Argentaria SA Bankia SA
Moody'
s S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch200
7 Aaa AAA AAA Aa1 AA AA Aa1 AA- AA- 201
2 A3 A A Aa3 A+ A Aa3 A A Baa3 BBB- BBB+
Italy UniCredit SpA Intesa Sanpaolo SpABanca Monte dei Paschi di
Sienna Spa
Moody'
s S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch200
7 Aa2 A+ AA- Aa2 A+ A+ Aa2 AA- AA- Aa3 A A+201
2 A3 BBB+ A- A2 BBB+ A- A2 BBB+ A- Baa1 BBB BBB
PortugalCaixa General de
Depositos SABanco Comercial
Portugues SA Banco Espirito Santo SA
Moody'
s S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch200
7 Aa2 AA- AA Aa1 A+ AA- Aa3 A A+ Aa3 A A+201
2 Ba3 BB BB+ Ba2 BB- BB+ Ba3 B+ BB+ Ba2 BB-
IrelandMerrill Lynch International
Bank Limited AIB Group Depfa bank plc
Moody'
s S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch200
7 Aaa AAA AAA A1 A+ Aa2 A+ AA- Aa3 A+ AA-201
2 Ba1 BBB+ BBB+ Baa1 A Ba2 BB BBB Baa3 BBB BBB+
GreeceNational Bank of Greece
SA EFG Eurobank Ergasias SA Alpha Bank AE
Moody'
s S&P Fitch Moody's S&P Fitch Moody's S&P Fitch Moody's S&P Fitch200
7 A1 A A Aa3 BBB+ A- Aa3 A- A A1 BBB+ A-201
2 C SD B- Caa2 CCC B- Caa2 CCC B- Caa2 CCC B-
Source: Bloomberg
European Banks’ Sovereign Debt Exposure
(in million EUR)
BNP Paribas SA
Credit Agricole
Societe Generale
Deutsche Bank AG
Commerzbank AG
Banco Santander
Banco Bilbao Vizcaya Argentaria
UniCredit SpA
Intesa Sanpaolo SpA
National Bank of Greece SA
EFG Eurobank Ergasias SA
Alpha Bank AE
-
2,0
00
4,0
00
6,0
00
8,0
00
10,
000
12,
000
14,
000
Greece
BNP Paribas SA
Credit Agricole
Societe Generale
Deutsche Bank AG
Commerzbank AG
Banco Santander
Banco Bilbao Vizcaya Argentaria
UniCredit SpA
Intesa Sanpaolo SpA
- 10,000 20,000 30,000 40,000 50,000 60,000
Italy
BNP Paribas SA
Credit Agricole
Societe Generale
Deutsche Bank AG
Commerzbank AG
Banco Santander
Banco Bilbao Vizcaya Argentaria
UniCredit SpA
Intesa Sanpaolo SpA
- 50 100 150 200 250 300 350 400
Ireland
BNP Paribas SA
Credit Agricole
Societe Generale
Deutsche Bank AG
Commerzbank AG
Banco Santander
Banco Bilbao Vizcaya Argentaria
UniCredit SpA
Intesa Sanpaolo SpA
- 500 1,000 1,500 2,000 2,500
Portugal
BNP Paribas SA
Credit Agricole
Societe Generale
Deutsche Bank AG
Commerzbank AG
Banco Santander
Banco Bilbao Vizcaya Argentaria
UniCredit SpA
Intesa Sanpaolo SpA
- 10,000 20,000 30,000 40,000 50,000 60,000
Spain
European Banks’ Sovereign Debt Exposure
(in million EUR)
“The euro is at the core of our European project of peace, stability and prosperity. We agreed today on a comprehensive set of measures to restore confidence and address the current tensions in financial markets. These measures reflect our unwavering determination to overcome together the current difficulties and to take all the necessary steps towards a deeper economic union commensurate with our monetary union”.
Euro Summit (Brussels 26 October 2011)
The Future of Euro The policy commitment
The Future of Euro The policy responses criticized as too
little and too late Disagreements among EZ core countries and
ECB over the appropriate response; Slow and complex EU policy-making process; Domestic political obstacles/ number of protests
and fall of many governments ; Political resistance to providing financial support
to countries in trouble/ critics opposed to the idea of rescuing countries without adequate budget discipline.
ECB Support: In May 2010, the ECB began buying government
bonds on secondary markets in an attempt to stabilize bond yields;
The flexibility in its short-term refinancing operations was increased (accepting the securities, including government bonds, with lower credit ratings).
Long-term refinancing operations (LTRO):1. In December 2011, providing loans to more than
500 Eurozone banks, totaling €489 billion2. In February 2012, which was even bigger, totaling
an additional €530 billion and had more than 800 banks participating.
Policy measures - ECB
Policy measures – Private sector involvment
Losses on Greek Bonds;
The biggest sovereign-debt restructuring ever, covering €206 billion of debt, holders of €172 billion of bonds agreed. Collective-action clauses boost the participation to €197 billion, 96% of the total, triggering credit default swaps. With this, Greece gets its second bailout.
The Future of EuroPossible only if: The policymakers address the underlying
causes – past and future imbalances in the EZ;
Fiscal consolidation in EZ and painful structural reform in the periphery are successfully completed;
For the EZ crisis to be over (in the absence of Eurobonds or fiscal transfers), some of Europe’s debt would need to be written down;
The sovereign banking feedback loop need to be broken and
The EZ would need to have a credible growth strategy going forward.
THANK YOU!