Download Lessons from Bretton Woods and from Czech history: A Czech view

Lessons from Bretton Woods
and from Czech history:
A Czech view on resolving
the euro crisis
Miroslav Singer
Governor, Czech National Bank
Embassy of the Czech Republic
London, 29 June 2011
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
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Introduction
Eurozone problems and lessons to be learned from
•
Collapse of Bretton Woods system
•
Split of Czechoslovakia and its currency in 1993
•
Czech currency and financial crisis in 1997
Lieber ein Ende mit Schrecken als ein Schrecken
ohne Ende. Ferdinand Von Schill (1776 – 1808)
(A horrible end is better than endless horror.)
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
2
Lessons from collapse
of Bretton Woods
• Key lesson: Impossible Trinity (simultaneously: fixed
exchange rate, free capital flows, independent monetary policy)
• Problems:





Globalisation of financial system
Enormous growth of cross-border capital flows
Expansive fiscal policy in USA
Limited stock of US gold
Various adjustments reduced partial imbalances and extended
existence of B-W only
Fixed exchange rate requires consistent macroeconomic
and monetary framework
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
3
Lessons from split of Czechoslovak
currency in 1993
• For many years fiscal transfers masked significantly inferior
performance of Slovak economy relative to Czech neighbour
• Performance gap was further widened by closing-off of Slovak
armament industry
• After split of Czechoslovakia (1 January) goal of keeping common
currency came under market pressures: Czech and Slovak entities
transferred their deposits to Czech banks and capital flowed out of
both countries
• After currency split (8 February) order was quickly restored
• Costs were relatively low (plan B followed since mid-1992 helped!)
Lessons: 1) lack of political will to preserve federal state
had quickly recognisable consequences for common curr.
2) situation had been easy to read by markets and citizens
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
4
Lessons from Czech currency and
financial crisis in 1997
• Until 1996 Czech Republic maintained fixed exchange rate
• Entry to OECD (1995) and related capital flow liberalisation
created Impossible Trinity
• Twin deficits and data errors
• Insufficiently credible first stabilisation package
• Lack of coordination between government and central bank
• Lack of coordination of macroeconomic policies + possibly too
restrictive monetary policy  severe financial crisis
• Many decisions were difficult to predict, read and adjust to
• Outcome was very costly and to significant extent avoidable (no
plan B existed  delays in establishing new framework)
Czech lessons: Predictable actions produce lower-cost
outcomes than unpredictable ones
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
5
Eurozone: several observations
• Eurozone’s mechanisms supported economic divergence
rather than convergence
• Rules are not only wrong, they are manifestly and idly
ignored regardless of their quality
• Authorities have made many U-turns:




Bank bailouts
Relaxation of monetary policy
Situation in financial sector
No-state-bailout clause
Belief that eurozone membership has disciplining
effects after joining proved unsubstantiated
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
6
Debts and deficits in EU in 2010
160
Maastricht:
deficit
GR
140
IT
120
BE
PT
100
D
F
Debt/GDP in %

Ireland:
debt 96,2%
deficit -32,4 %
UK
80
60
FI
Maastricht: debt
CZ
DK
S
40
LUX
20
EST
-12
-10
-8
-6
-4
Deficit/GDP in %
-2
0
0
2
Source: Eurostat
Only five EU countries were compliant with both
Maastricht budget criteria simultaneously in 2010;
Estonia, Finland and Luxembourg out of the 17
Eurozone countries
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
7
Eurozone: some myths
• Consequences of Greek bankruptcy for German and French
banking sector
• Need for ECB and central banks to have positive equity
(numerous central banks have negative equity; real capital
of central bank is its credibility and reputation)
• Eurozone cannot survive Greek default
• When debt problems are resolved Greece and Portugal are
saved (They are not!)
Competitiveness is the real issue for these countries
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
8
USD/EUR (January 2005 – May 2011)
1,7
May 2011
1,43 USD/EUR
1,6
1,4
1,3
1,2
1,1
June 2010
1,22 USD/EUR
1,0
20
05
M
20 01
05
M
20 04
05
M
20 07
05
M
2 0 10
06
M
20 01
06
M
20 04
06
M
20 07
06
M
20 10
07
M
20 01
07
M
20 04
07
M
20 07
07
M
20 10
08
M
20 01
08
M
20 04
08
M
20 07
08
M
20 10
09
M
2 0 01
09
M
20 04
09
M
20 07
09
M
20 10
10
M
2 0 01
10
M
20 04
10
M
20 07
10
M
20 10
11
M
2 0 01
11
M
04
USD/EUR
1,5
Source: Eurostat
Euro gained 17.5% against dollar between June 2010
and May 2011: markets do not appear to think that
Greece is that fundamental to eurozone survival
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
9
Eurozone in limbo?
• Markets are completely confused and do not see any
predicable outcome to adjust to
• No willingness to allow Greece to leave eurozone and to
depreciate, and no willingness to support country
sufficiently either
Due to past incredible and unclear communication
solution to crisis has already been made unavoidably
costly
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
10
Two (possibly costly) ways to restore
competitiveness
• Within framework of eurozone



Debt restructuring
Rigorous fiscal discipline
Aid focused on restoration of competitiveness (conditional on
distribution of aid not being managed by Greek authorities)
• “Classic” IMF prescription



Fiscal discipline
Debt restructuring
Currency devaluation (some aid to avoid overshooting after exit
from eurozone would be desirable)
• One of these ways should be chosen and clearly communicated
Further continuation of current uncertainty will
imply significant economic costs
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
11
Conclusions
• Causes of crisis lie in eurozone institutions (we were assured
that they were created to prevent crises)
• Also, crisis was caused by incoherent and/or insincere
communication, which increased uncertainty of market
participants
• “Safe” Greek membership in eurozone must present solution
that is broad, generous and general enough to convince markets
• Muddling through has significant economic costs
• There is now no possibility of happy (relatively costless) end
• European decision-makers are unduly preoccupied by Greece
• Plan B would be highly desirable
Any disorderly outcome clearly goes against
interests of Czech Republic and its economy
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
12
Thank you
Miroslav Singer
[email protected]
Tel: +421 224 412 000
Česká národní banka
Na Příkopě 28
115 03 Praha 1
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
13
Reserve slides
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
14
Structure of Greek government debt
IMF and EU (rescue
package - April 2010)
3%
Greek banks
15%
30%
Foreign banks
Insurance companies
15%
Mutual, investment
and pension funds
13%
10%
Central banks
14%
Other
Source: Barclays
Capital, IMF
More than half of Greek debt is financed by foreigners
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
15
Estimated exposures to Greek
government debt (bn EUR; mostly end of 2010)
Insurance
companies
Greece
Germany
France
2)
Benelux
Austria
Italy
Spain
Portugal
rest of Eurozone
G. Britain
USA
Japan
Switzerland
rest of world
Total
4
4
16
4
1
4
1
1
1
0
1
1
1
37
Mutual,
investment
and
pension
funds
29
2
3
13
3
1
0
As % of
Central
banks
7
7
1
2
39
1
1
3
2
55
1
56
Other
6
0
1
2
0
1
0
0
0
0
0
0
11
Banks
48
19
15
6
2
2
1
1
3
2
1
0
0
1
101
Total
93
25
41
25
3
10
2
4
43
3
2
4
1
5
260
GDP
(2011e)
41,0%
1,0%
2,0%
2,5%
1,1%
0,6%
0,1%
2,1%
ECB
Securities
Market
Program
Poz námky: (1) T abulka nezahrnuje přímou ani nepřímou expozici národních vlád pramen ící z poskytnutého zachranného balíčku z dubna
2010 ve výši 110 mld. eur. (2) Vysoký podíl celkové expozice na HDP v zemích Benelexu je způsoben tím, že jsou investiční fondy
působící v členských zemích EU velm i často domicilovány v Lucem bur sku.
Source: Barclays Capital, IMF
Greek financial institutions are biggest creditors
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
16
CDS issued on government debt in
selected EU countries (in USD bn)
160
148
Gross notional
140
Net notional
120
bn USD
100
80
78
60
53
40
26
19
20
7
5
10
1
4
0
Greece
Spain
Belgium
Portugal
Ireland
Source: DTCC
1) Data cover overwhelming majority (90-95%) of
x-border transactions 2) Net notional data approximate
risk in case of default
M. Singer – Lessons from Bretton Woods and from Czech history: A Czech view
on resolving the euro crisis
17