global financial crisis: an emerging european perspective
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Global financial crisis: An emerging European perspective. Erik Berglof, Chief Economist, EBRD. Comparing to the Great Depression: World industrial production, now vs. then. Source: Eichengreen, O´rourke (2010). - PowerPoint PPT PresentationTRANSCRIPT
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Global financial crisis: An emerging European perspective
Erik Berglof, Chief Economist, EBRD
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Comparing to the Great Depression: World industrial production, now vs. then
Source: Eichengreen, O´rourke (2010)
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Comparing to the Great Depression: Volume of world trade, now vs. then
Source: Eichengreen, O´rourke (2010)
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Comparing to the Great Depression: World equity markets, now vs. then
Source: Eichengreen, O´rourke (2010)
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Smaller economies, then and now
Belgium
SwedenPoland
Czech and Slovak Republics
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Outline
A bad crisis, but stopped in its tracks Policy response strong, but left scars Dealing with aftershocks
– Unemployment
– Fragile banks + regulatory tsunami
– Fiscal – Greece, Eurozone…
Altered prospects for emerging Europe – and the Euro
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The phases of the crisis
0
200
400
600
800
1000
1200
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
EMBI EuropeEMBI Global
I. Financial crisis
build-up
II. Systemic outbreak
III. Systemicresponse
VI. Sovereign
Crisis?
Source: IMF
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Phase 1: Financial crisis build-up
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-20
-15
-10
-5
0
5
10
15
Mar
-07
May
-07
Jul-0
7
Sep-
07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-
08
Nov
-08
Jan-
09
Mar
-09
Per cent
Turkey and CEB
Russia and EEC
SEE
Euro Area
U.S.
Period of decoupling
A fleeting moment of decoupling, followed by precipitous recoupling…
Industrial production 2007-2009 (y-o-y)
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Phase II: Systemic outbreak
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Emerging markets more resilient
Average response of EMBI to daily changes in the VIX during periods of financial volatility in the United States
Jan-Mar91 1/ Jul97-Feb98 Jul98-May03 Jul07-Sep08 Sep08-Jan090
2
4
6
8
10
12
14
16
18
Note: Based on regression of daily changes in EMBI spreads on changes in the VIX in periods during w hich the VIX consistently exceeded 20 points. 1/ Constrained by data availability. Turbulence period started in July 1990.
EMBIEMBI Europe
EMBI Poland
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Crisis challenge:Systemic problem – systemic response
Source: Bankscope, bank websites
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Phase III: Systemic response
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Crisis response: massive, comprehensive and coordinated Domestic policies: Massive in western Europe and
mature in central and eastern Europe Massive & coordinated international support
– IMF resources tripled from $250 to $750 bn
– EU BOP support quadrupled from €12.5 to €50 bn
– G20: capital to multilateral development banks
Parent banks maintained exposures A new coordination platform – Vienna Initiative
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Magnitude of official support massive
Official support (percent of GDP)
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
Q3 1997: Asian currenciesdevalue sharply
Q4 1997: Closure of Ind. and Thaifinancials, Korean won devalues
Q1 1998: Social unrest in Ind.,Korean debt restructuring,
Q2 1998: Social unrest in Ind.,Russian stock market crash
Q3 1998: Russia default, Braz.stock market crash, LTCM
Q4 2008: Gov. support for largeUS, UK and Swiss banks
Q1 2009: Drop in foreign inflowsand trade
Q2 2009
Korea Thailand
Philippines Indonesia
Hungary Latvia
Romania Ukraine
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Improvised response: The Vienna Initiative
Fill institutional vacuum - coordinate– Bring together authorities (home and host)– Private and public sector
Incentivise banks to coordinate– Regulatory incentives (IMF/EU prog rams)– Contingent capital (Joint IFI Action Plan)– “Naming/shaming” (memoranda of understanding)
Intensify Information-sharing– Coordinate within IMF/EU programs + IFI collaboration
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Sudden Stop in Emerging Europe muted
-3.4 -4.4
-11.1
-7.8
-11.9-15
-10
-5
0
5
10
15
EmergingEurope
CA andCaucasus
Russia &Ukraine
Latin America Emerging Asia
Per centAvg 2007Q4/2008Q1 Avg 2008Q4/2009Q1
Percentage changes in external assets of BIS-reporting banks
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Currency shooting avoidedCurrency overshooting avoided
Past crises
Current programs
Nominal effective exchange rates
Median and interquartile ranges
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Output drop deep, sudden, and varied
-25
-20
-15
-10
-5
0
5
10
Latv
ia
Esto
nia
Ukr
aine
Turk
ey
Hun
gary
Geo
rgia
Arm
enia
Lith
uani
a
Slov
enia
Cze
ch R
ep.
Cro
atia
Kaz
akhs
tan
Rus
sia
FYR
Mac
edon
ia
Slov
ak R
ep.
Pola
nd
Serb
ia
Rom
ania
Bul
garia
Mon
golia
Mol
dova
Bel
arus
Q4 2008 Q1 2009 Q2 2009
Per cent
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Phase IV: Towards sovereign crises in advanced economies?
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Unemployment high - still rising in SEE and the Baltics
Unemployment rates (Per cent)
4
6
8
10
12
14
16
18
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09
Feb-
09
Mar
-09
Apr
-09
May
-09
Jun-
09
Jul-0
9
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-09
SEE Baltics CE EEC CIS Russia Turkey
Source: CEIC.
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Europe’s banks in unclear state Weak balance sheets
– Total loan write-downs (IMF: USD 442 bn) + higher unrecognised share than in other markets
Still net tightening (ECB lending survey) Compounded by regulatory reform in full swing:
– Capital positions and liquidity – costs for growth
– Uncertainty over bank tax, requirements of bank restructuring, and collaboration between supervisors
Emerging Europe still depend on bank finance
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Regulatory tsunami
Stronger financial regulation needed Financial sectors must share eventual crisis costs
But… Timing in a world of multi-speed regional growth May stunt market development (e.g., restricting
liquidity risks and maturity transformation) Regional differences lost in global regulation
(cross-border banking worked for Emerging Europe before and during crisis, but not everywhere else)
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Debt increase follows banking crisisCumulative increase in real public debt in the three years following the banking crisis
Source: Reinhart and Rogoff (2008)
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What if the crisis had not happened?
Greece
0
50
100
150
200
2001
2003
2005
2007
2009
2011
2013
2015
General Government Debt: WEO April 2010 Projection and Counterfactual(Per cent of GDP)
Spain
-20
30
80
130
180
2001
2003
2005
2007
2009
2011
2013
2015
Portugal
-20
30
80
130
180
2001
2003
2005
2007
2009
2011
2013
2015
Italy
-20
30
80
130
180
2001
2003
2005
2007
2009
2011
2013
2015
Actual Counterfactual
Note: Calculations based on assumption that (1) half the actual structural fiscal loosening (estimated as in WEO April 2010) in 2009 and none thereafter and (2) unit revenue elasticity.
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Emerging Europe recovery lagging
90
100
110
120
130
2008 2009 2010 2011
Middle East And North AfricaLatin AmericaDeveloping AsiaEBRD region
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Recovery lagging, particularly in south-eastern Europe and the Baltics
80
85
90
95
100
105
110
2008 2009 2010 2011
Central EuropeThe Baltic StatesSouth-eastern Europe
SEE: Compared to January, revised 2010 growth down; negative or flat growth projected for Bulgaria and Romania.
Baltic countries: growth outlook remains negative on average
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Why recovering more slowly?
Export dependence on EU limits export demand Follows from exceptionally large output drops:
– High unemployment weighs on domestic demand
– Risk perceptions, non-performing loans → credit growth
– Fiscal consolidation 2010-11 → contractionary
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Corporate credit stagnating/contracting
-15
-10
-5
0
5
10
15
20
25
30
35
-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5
Corporate credit growth,Q3-09 to Q1-10, annualised
Slovak Republic
PolandLithuaniaLatvia Hungary
Estonia
Croatia Romania
GDP growth, Q4-09 to Q1-10, annualised
Ukraine
Russia
Moldova
Kazakhstan
Belarus
Serbia
Bulgaria
Albania Slovenia
Source: National authorities via CEIC data service, EBRD staff calculations.
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Large deficits lead to fiscal contractions
Structural Fiscal Balance (Per cent of GDP)
-8-7-6-5-4-3-2-10
Kaz
akhs
tan
Rus
sian
Fede
ratio
nS
lova
kR
epub
lic
Ukr
aine
Cze
chR
epub
licS
lova
kR
epub
lic
Slo
veni
a
Pol
and
Hun
gary
2009 2010 2011
Source: IMF, European Commission.
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Emerging Europe out of sync Slower monetary easing, but quicker ‘fiscal
exit’ in Eurozone – premature for emerging Europe
Divergence also within Emerging Europe with some countries getting large capital inflows
Regulation with increased capital requirements risks coming too early
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Is there a Phase V of sovereign crises in emerging Europe…?
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Emerging Europe and the Eurozone
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Eurozone at a crossroads
€750bn buys time to build fiscal sustainability So far only €60bn – not enough given pressures ECB shift to purchases of sovereign debt critical Large permanent mutual fiscal insurance
mechanism with rigorously enforced rules… …or a break up with unimaginable
implications for European project…
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Eurozone as an optimal currency area
Optimal currency areas partly endogenous Significant convergence since formation
– Real business cycle
But also persistent or increasing differences– Diverging inflation => real exchange rates misaligned
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Eurozone as the end zone
Costs and benefits of accession shifted:
(1) Costs of loss of flexibility and premature entry?
=> Prepare better (local capital markets)
(2) Commitment value of Euro anchor?– Benefits smaller
– Uncertainty about rules and long-term future
– Timing for entry more distant
=> Strengthen/clarify architecture
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Thank you
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Needed: a new growth agenda
Safer growth after the ‘great moderation’:– Medium term, counter-cyclical macro policies
– Diversify funding sources - local capital markets
– Diversify exports and develop intra-regional trade
Strengthened competitiveness: – Preventing a rapid rise of wage costs
– Stimulating firm entry and exit, and SME growth
– Exploiting cost advantages in the periphery