the eurozone sovereign debt crisis: lessons for taiwan
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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
201
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 !!!
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