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Crisis Management – General Reflections and the Austrian Experience Ewald Nowotny Governor of the Oesterreichische Nationalbank Athens, May 27, 2009 www.oenb.at Outline • The crisis in a nutshell • The reaction of Austrian economic policy • The crisis in Central, Eastern and Southeastern Europe (CESEE) • The crisis in CESEE from the perspective of Austrian banks www.oenb.at -2- [email protected] The crisis in a nutshell www.oenb.at -3- [email protected] Initial conditions and trigger of the crisis Initial conditions • High saving levels and low interest rates “search for yield” • Securitization of assets + underregulation of financial markets complex, hard-to-value assets and increasing interconnection of financial institutions around the globe • Leveraging increases vulnerability of MFIs Trigger • Problems on U.S. subprime market caused initial losses www.oenb.at -4- [email protected] Amplification and contagion • Financing problems of MFIs in short-term money markets “Fire sales” of assets Decrease of asset prices (esp. of complex, hard-to-value papers) Decline of equity • Need to improve capital ratio deleveraging by selling assets and/or reducing lending • Feedback loop between financial and real sectors of the economy • Global deleveraging large-scale capital outflows from emerging economies www.oenb.at -5- [email protected] Needs for policy action Financial institutions • • • • Decline of equity Decline in confidence Collapse of interbank market Toxic assets Need to recapitalize financial institutions Deposit insurance to prevent bank runs Measures to restore liquidity Framework for valuing and disposing of toxic assets Nonfinancial sector • Contagion of real economy Fiscal and monetary policy measures to dampen economic downturn Emerging economies • Capital outflows, capital account pressures www.oenb.at Financial support -6- [email protected] The reaction of Austrian economic policy www.oenb.at -7- [email protected] The Austrian banking support package Capital measures: EUR 15 billion to strengthen capital base of Austrian banks Agreed capital measures amount to EUR 6.9 billion (paid out: EUR 4.7 billion): HGAA: EUR 900 million participation capital Erste Group: EUR 2.7 billion participation capital (+ hybrid capital) RZB: EUR 1.75 billion participation capital VBAG: EUR 1 billion participation capital BAWAG: EUR 0.55 billion participation capital (+ EUR 0.4 billion asset guarantees) Liquidity measures: EUR 65 billion for clearing bank and bond guarantees Bank bonds issued under state guarantee amount to EUR 15.65 billion Austrian clearing bank allotted a total amount of about EUR 6 billion Deposit insurance: deposit guarantee raised by EUR 10 billion Guarantees for nonfinancial corporations: EUR 10 billion www.oenb.at -8- [email protected] The Austrian bank stabilization package – international comparison Bank stabilization packages in Europe in % of GDP 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% en ed rla et he N Sw nd s a ni ov e Sl st ria Au nd Fi n la K U y er m an G ce Fr an l ga rtu Po Sp ai n G re ec e 0% Source: OeNB. www.oenb.at -9- [email protected] The role of fiscal policy in times of crisis • Scope of crisis requires discretionary fiscal policy measures – Traditional monetary policy hits the zero lower bound – Automatic stabilizers help, but are not large enough – Output gap expected to remain negative for a longer period Implementation lag of discretionary fiscal policy less problematic – Threat of hysteresis effects (increase in NAIRU) via reduction in human capital • Potential for larger multipliers – Low capacity utilization – High number of liquidity-constrained households/firms www.oenb.at - 10 - [email protected] The Austrian fiscal stimulus package Estimated Growth and Employment Effects of Economic Stimulus and T ax Reform Measures Measures Volume Employment1 GDP in EUR million in persons in % of baseline solution 2009 2010 2009 2010 2009 2010 Consumption-stimulating measures of which: tax reform 4.360 2.910 4.310 3.060 9.312 5.508 17.840 11.718 0,57 0,33 0,89 0,60 Investment incentives and export facilitation 1.395 1.385 590 1.079 0,05 0,07 Investment in infrastructure 580 745 2.698 6.299 0,16 0,33 Job support measures1 275 275 - - 0,04 0,06 6.610 6.715 12.600 25.218 0,82 1,36 4.095 4.758 T otal of which: relevant for deficit Source: Austrian Finance Ministry, OeNB. The job support effects of short-term working rules and of the job support initiatives cannot be quantified at present. Note: Simulation with the OeNB's macro model (AQM). Volumes are annual totals (reflecting increases over the 2007 budget), effects on 1 www.oenb.at - 11 - [email protected] The crisis in Central Eastern and Southeastern Europe (CESEE) www.oenb.at - 12 - [email protected] CESEE output expected to shrink in 2009 GDP forecast at constant prices, year-on-year percentage change 11 Austria Euro area Slovakia Czech Rep. Poland Hungary Bulgaria Romania Croatia Ukraine Russia 9 7.1 6.4 7 6.0 5.6 4.8 5 3.2 3 2.4 1.5 0.8 1 0.7 -0.1 -1 0.8 0.3 0.5 -0.1 -3 -4.0 -0.1 -0.3 -2.6 1.5 1.0 0.0 -1.4 -5 2.1 1.8 -1.6 -2.7 -3.0 -4.0 -3.8 -4.0 -6.3 -7 -8.0 -9 2008 2009f 2010f Source: European Commission (Spring Forecast), May 2009. For Ukraine: IMF (World Economic Outlook), April 2009. www.oenb.at - 13 - [email protected] High share of foreign currency credit in some CESEE and CIS countries constitutes a major risk … O utstanding total credit to households end-of-period stock as percentage of GDP; points: share of foreign currency (FC) credit in total credit to households 40 Slovakia Czech Rep Poland Hungary Bulgaria Romania Croatia Ukraine 100 Russia 90 35 81 80 30 72 70 67 67 25 60 59 53 20 50 40 39 15 29 27 10 30 29 20 18 5 0 12 10 9 1 2003 3 2008 5 1 0 2003 2008 0 2003 Domestic LC credit to households 2008 2003 2008 2003 2008 2003 Domestic FC credit to households 2008 2003 2008 2003 2008 2003 2008 Share of FC credit in total credit to households (rhs) Source: ECB, Eurostat, National central banks, National statistical offices, OeNB. Note: Foreign currency credit includes both foreign currency-denominated and foreign currency-linked credit. www.oenb.at - 14 - [email protected] ... in case of sudden exchange rate depreciations N ational currencies and the euro Euro per national currency unit, change in percent 40 Czech Rep Poland Hungary Bulgaria Romania 30 Ukraine Russia 25.7 17.5 20 10.5 10 Croatia 6.1 11.9 10.5 8.4 6.7 6.2 2.8 2.7 -0.1 0.0 0.0 0.0 0.0 4.2 3.8 1.6 2.7 0.7 0.1 0 -3.5 -4.9 -3.6 -10 -20 -13.1 -16.2 -17.1 -21.1 -22.0 -30 -31.0 -34.6 -40 31 Dec 2004 to 29 June 2007 29 June 2007 to 12 Sept 2008 12 Sept 2008 to 17 Feb 2009 17 Feb 2009 to 29 April 2009 Source: Thomson Financial, OeNB. www.oenb.at - 15 - [email protected] Huge current account deficits in some CESEE and CIS countries Current and capital account balance and its components four quarter rolling sum in % of 4q rolling sum of GDP; points for total current and capital account balance (i.e. sum of subbalances) 20 Slovakia Czech Rep Poland Hungary Bulgaria Romania Croatia Ukraine Russia 10 6.0 0 -2.3 -4.4 -5.4 -7.0 -7.4 -9.3 -10 -11.9 -20 -24.5 -30 -40 Q 4/08 Q 4/08 Q 4/08 Q 4/08 Q 4/08 Q 4/08 Q 4/08 Q 4/08 Q 4/08 Trade balance Services balance Income balance Transfer balance Capital account balance Current & capital acc. balance Source: Eurostat, National central banks, OeNB. www.oenb.at - 16 - [email protected] Crisis leads to high write-downs in emerging markets Estimated write-downs for banks in emerging markets (by country of origin, in billion USD) IMF estimates for Eastern Europe Latin America, 181 Asia, 270 Include local banks Include foreign owned subsidiaries Direct cross border credits are not considered! Write downs for banks in emerging markets 796 billion USD Eastern Europe: 185 billion USD Eastern Europe, 185 Middle East/Africa, 160 Source: IMF. www.oenb.at - 17 - [email protected] International response to the crisis – timeline of events with a focus on CESEE Nov 08 Oct 08 End of Oct 08 EU and IMF agree on USD 25 bn support package for Hungary. Feb 09 21 Feb 09: IMF provides EUR 7.5 bn funding to Latvia. 23 Feb 09: World Bank president demands support for CESEE. www.oenb.at Beginning of Nov 08: IMF provides loan of USD 16.5 bn to Ukraine. Dec 08 Dec 08: IMF agrees on USD 2.5 bn funding for Belarus. Dec 09: The European Commission raises its current account support to EUR 25 bn Mar 09 Jan 09 Jan 09: Banks from Austria, Germany, Belgium, France, Italy and Greece call for an action plan for CESEE. 16 Jan 09 IMF approves EUR 402.5 mn Stand-by-Arrangement for Serbia. 26 Jan 09 IMF starts talks about a new Standby-Arrangement for Turkey. Apr 09 Mar 09: World Bank, EBRD and EIB plan to lend EUR 24.5 bn to CEE 1 Mar 09: EU rejects Hungarian proposal for a EUR 180 bn CEE package, 25 Mar 09: IMF SBA disbursement of USD 2.35 bn for Hungary, IMF approves USD 17.5 bn loan to Romania. 26 Mar 09: Serbia signs an SBA over USD 3 bn with the IMF. 2 Apr 09: IMF funds increased to USD 500 bn and additional Special Drawing Rights of USD 250 bn as a consequence of the G20 meeting. 14 Apr 09: Poland seeks USD 20.5 bn and flexible credit line from the IMF. 17 Apr 09: IMF credit to Ukraine could be resumed with a new instalment of USD 2.8 bn. - 18 - May 09 5 May 09: European Council increases current account support to EUR 50 bn [email protected] The crisis in CESEE from the perspective of Austrian banks www.oenb.at - 19 - [email protected] Austrian banks’ exposure to CESEE and CIS markets is high… CESEE-Exposure of EU-15 banks EUR 988 bn Other 13% • Austrian banks dominate lending to new Member States, but not to SEE and CIS Austria € 199; 20% • EU banks’ lending to CESEE decreased by 4.4% in the fourth quarter of 2008 Sweden 8% Netherlands 8% • The decline in Western banks’ exposure to CESEE corresponds to developments in other emerging markets Germany 16% Belgium 10% France 11% Italy 15% Source: BIS, 2008Q04 (provisional data); in bn EUR resp. in %. www.oenb.at - 20 - [email protected] … but exposure is broadly diversified across countries … Exponierung AT Banken CESEE Exposurevon of Austrian banks to in CESEE • CESEE is a heterogeneous region and the exposure of Austrian banks in bn EUR is broadly diversified 45 40 • Total exposure of Austrian banks to CESEE: EUR 199 billion [incl. UnicreditBA and HGAA: ~ EUR 293 billion] 35 30 25 20 • Austrian banks’ exposure is broadly diversified but focused on new EU Member States (¾ of exposure) 15 10 5 0 CZ RO SK HU HR RU PL UA SI RS BG BA AL TR BY Rest • About 20% of EU-15 banks’ total exposure to CESEE www.oenb.at EA EU SEE CIS Not allocated Quelle: BIZ, 2008Q04. - 21 - [email protected] … and subsidiaries in CESEE have a solid local funding basis Deposit Gap in 2008Q 4 Loan-to-deposit ratio of nonbanks in % < 100, < 150, NMS2007 24% 150 =< SEE 14% Average CESEE subsidiary: 117% LDR NMS2004 6% CIS 56% CIS: 172% LDR NMS-04: 102% LDR Refinancing of CESEE subsidiaries 100% 80% 60% NMS-07: 130% LDR 40% SEE: 114% LDR 20% 0% NMS-2004 Source: OeNB, unconsolidated figures, Q4 2008. www.oenb.at - 22 - NMS-2007 Deposits of nonbanks Equity Subordinated debt Claims on nonbanks SEE CIS Deposits of banks Liabilities evidenced by paper Other liabilities [email protected] Austrian banks continue to support subsidiaries in CESEE • Questionnaire sent to five major banks shows that net position increased further in 2008 • Austrian banks intend to keep their net position in most CESEE markets stable/increasing • Efforts aiming at macroeconomic stabilization have to complement bank liquidity provision Q uarterly Growth Rates of N et Exposure to CESEE Subsidiaries 12 in pp 10.3 10 8 7.8 7.7 2008Q3 2008Q4 6 4 3.0 2 0 2008Q1 www.oenb.at - 23 - 2008Q2 [email protected] Summary • Crisis called for fast and coordinated policy reaction • Austrian bank stabilization package guarantees functioning of the Austrian banking sector • Fiscal package in Austria helps dampen adverse impact on real economy • Impact of crisis on CESEE region is heterogeneous • Financial support to CESEE provided by international institutions helps stabilize the region • Exposure is high, but diversified; local funding base of Austrian banks in CESEE is solid • In line with their strategic objectives, Austrian banks continue to support subsidiaries in CESEE www.oenb.at - 24 - [email protected] Crisis Management – General Reflections and the Austrian Experience Ewald Nowotny Governor of the Oesterreichische Nationalbank Athens, May 27, 2009 www.oenb.at