Download Digression: The European Debt Crisis

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Digression: The European Debt Crisis 2010
Prof. Dr. Rainer Maure
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The European Debt Crisis 2010
1. The Causes of the Crisis
➤ The crisis can be seen as the result of two factors:
1. One interest rate only for 17 member states!
As seen in chapter 6.2.3., business banks of all member
states can borrow money from the ECB at the same interest
rate.
■
A differentiation of the interest rate according to the different
home countries of the commercial banks is not practiced.
■
As a consequence, the interest rate for bank credits
(especially mortgage and firm credits) have aligned in all
member states („interest-rate-pass-through“).
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■
Prof. Dr. Rainer Maure
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The European Debt Crisis 2010
1. The Causes of the Crisis
2.
Different inflation rates in all 17 member states!
GDP Price Deflator Relative to Germany
Indices Relative to Germany (1999 = 100%)
130%
125%
120%
115%
110%
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105%
Euro area (16 countries)
Source: EU Commission, AMECO, Own Calculations
Prof. Dr. Rainer Maure
Ireland
Greece
Spain
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
100%
Portugal
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The European Debt Crisis 2010
1. The Causes of the Crisis
➤ If nominal interest rates are identical, but inflation rates
diverge, real interest rate diverge too:
Real Interest Rate  Nominal Interest Rate  Inflation
ri

i

i
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=> Countries with high inflation rates experience low real interest
rates!
Prof. Dr. Rainer Maure
Countries with low inflation rates experience high real interest
rates!
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The European Debt Crisis 2010
1. The Causes of the Crisis
➤ Convergence of nominal interest rates & divergence of real
interest rates using the example of 10 years govern. bonds :
Variance Coefficients across the 12 EMU Founding Member States
1,5%
1,3%
1,1%
0,9%
0,7%
0,5%
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0,3%
0,1%
Jan. 97
-0,1%
Jan. 98
Prof.
Dr. Rainer
Maure
Source:
Eurostat,
Jan. 99
Own Calculations
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Jan. 06
Jan. 07
Jan. 08
Nominal Interest Rates for 10-Year Government Bonds
Inflation Rates (HCPI)
Real Interest Rates for 10-Year Government Bonds
Jan. 09
Jan. 10
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The European Debt Crisis 2010
1. The Causes of the Crisis
➤
Divergence of real interest rates using the example of 10 years
government bonds :
Real Interest Rates for 10 Years Government Bonds (based on BIP-Deflator)
9,0%
8,0%
7,0%
6,0%
5,0%
4,0%
3,0%
2,0%
1,0%
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0,0%
Jan. 97 Jan. 98
-1,0%
Jan. 99 Jan. 00 Jan. 01
Jan. 02 Jan. 03 Jan. 04
Jan. 05 Jan. 06 Jan. 07 Jan. 08
Jan. 09 Jan. 10
-2,0%
-3,0%
-4,0%
Germany
Prof.
Dr. Rainer
Maure
Source:
Eurostat,
Own Calculations
Spain
Greece
Ireland
Portugal
-6-
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EquilibriumDebt
interestCrisis
rate, if all2010
countries would
The European
rate.
1. Theexperience
Causestheofsame
theinflation
Crisis
➤ What consequences have different real interest rates for the
capital market:
r = real interest rates
S(Y)
r = real interest rates
S(Y)
Excess supply of
credits
rL *
r*
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rH*
I(Y)
S, I
Low Inflation Country:
rL* = i*- πL
Excess demand for
credits
High Inflation Country:
rH* = i*- πH
I(Y)
S, I
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The ECU total capital market is in equilibrium, while there is a
disequilibrium on the capital market of the member countries!
The average interest rate is equal to the market equilibrium rate:
(rL* + rH*) /2 = r*
r = real interest rates
S(Y)
r = real interest rates
S(Y)
Excess Supply of
credits
rL *
r*
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rH*
I(Y)
S, I
Low Inflation Country:
rL* = i*- πL
Excess demand for
credits
High Inflation Country:
rH* = i*- πH
I(Y)
S, I
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The European Debt Crisis 2010
1. The Causes of the Crisis
➤ Result of diverging interest rates:
➤
■
The high inflation country has an incentive to borrow from the
low inflation country, because of its low real interest rate.
■
The low inflation country has an incentive to lend money to the
low inflation country, because of its the high real interest rate.
If this scenario holds on over several years, the high inflation
country will accumulate more and more debt hold by the low
inflation country:
Cumulative Debt  Sum of Yearly Excess Demands for Credits
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
T
D
t 0
■
Prof. Dr. Rainer Maure
t
The following diagram shows that this mechanism has been at
work in the ECU over a long span of time:
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The European Debt Crisis 2010
1. The Causes of the Crisis
Bis April 2010 aufgelaufene Nettoauslandsverschuldung in Prozent des BIP und
durchschnittlicher Realzins von Januar 1999 bis Dezember 2009
120%
Nettoauslandsverschuldung
in % des BIP
100%
The lower the real interest rate,
the higher the accumulated net
debt position.
Portugal
Spain
Greece
80%
60%
Ireland
40%
Italy
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20%
0%
1,4%
-20%
France
Austria
Finland
1,9%
2,4%
Realzins
2,9%
Netherlands
Belgium
Germany
-40%
Quelle: Eurostat, Eigene Berechnungen
Prof. Dr. Rainer Maure
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The European Debt Crisis 2010
1. The Causes of the Crisis
Bis Dezember 2009 aufgelaufene Nettoauslandsverschuldung in Prozent des BIP und
durchschnittliche HVPI Inflationsrate von Januar 1999 bis Dezember 2009
120%
Nettoauslandsverschuldung in % des BIP
100%
80%
60%
Portugal
The higher the inflation rate (the
lower the real interest rate), the
higher the accumulated net debt
position.
Spain
Greece
Ireland
40%
Italy
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20%
0%
1,4%
France
Finland
Austria
1,6%
1,8%
Inflationsrate
2,0%
2,2%
2,4%
2,6%
2,8%
3,0%
3,2%
Netherlands
-20%
Germany
Belgium
-40%
Quelle: Eurostat, Eigene Berechnungen
Prof. Dr. Rainer Maure
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The European Debt Crisis 2010
1. The Causes of the Crisis
International Net Debt Position of Eurozone Debtor and Creditor Countries
1500
Bn. Euro
1000
500
0
Jan. 98
Jan. 99
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Jan. 06
Jan. 07
Jan. 08
Jan. 09
Jan. 10
-500
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-1000
-1500
The rise of the net debt position of the high inflation countries went
hand in hand with the rise of a net savings position of the low inflation
counties.
Sum of Net International Debt Position of Spain, Greece, Ireland, Portugal
Sum of Net International Debt Position of Germany, Belgium, Luxembourg, Netherlands
Prof. Dr. Rainer Maure
Source: Eurostat, Own Calculations
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The European Debt Crisis 2010
1. The Causes of the Crisis
➤
Why did this process continue over a period of nearly 10 years?
■ The above process can give rise to a self-enforcing debt spiral
(positive feed-back loop) :
◆
◆
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◆
Prof. Dr. Rainer Maure
◆
Credits flow from the low inflation country to the high inflation
country.
In the high inflation country, these credits are used to buy goods.
The demand for goods grows therefore over the supply of goods
in the high inflation country.
If the goods demanded in the high inflation country are not
tradable (e.g. real estate or services), an excess demand for
goods produced in the high inflation country results.
This excess demand causes then again inflation!
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The European Debt Crisis 2010
1. The Causes of the Crisis
◆
◆
◆
In the low inflation country, the credit flow to the high inflation
country causes a loss of purchasing power.
If this loss of purchasing power is not compensated by an export
demand from the high inflation country, excess supply results in
the low inflation country.
This excess supply causes then again a lower inflation rate in the
low inflation country.
■ Consequently, if the goods demanded for by the high inflation
country are not perfectly tradable, the inflationary differences
will prevail!
■ The following circular flow presentation displays this relationship
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graphically:
Prof. Dr. Rainer Maure
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The European Debt Crisis 2010
1. The Causes of the Crisis
➤ Self-enforcing debt-spiral:
High (low)
real interest
rate in HIC
(LIC).
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High (low)
inflation in
HIC (LIC).
Reduction of
demand for
goods in LIC.
Indebtedness
(Net savings) in
HIC (LIC).
Demand for nontradable goods in
HIC grows.
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The European Debt Crisis 2010
1. The Causes of the Crisis
➤ When will the debt spiral come to a standstill?
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■ The growing indebtedness of the high inflation country
Prof. Dr. Rainer Maure
causes a higher credit default probability.
■ As soon as capital markets become aware of this, risk
premiums in the interest rates start to grow an cause
higher real interest rates for the high inflation country.
■ This sets an incentive for the high inflation country to
reduce its demand for debt.
■ As the historical experience shows, in needs some time
before capital markets become aware of this.
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The European Debt Crisis 2010
1. The Causes of the Crisis
➤ Consequently, the European debt crisis is not a
sovereign debt crisis, but a debt crisis of the private
sector of the high inflation countries.
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➤ The following diagrams display this:
Prof. Dr. Rainer Maure
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The European Debt Crisis 2010
1. The Causes of the Crisis
Spain
100%
Percent of GDP
90%
80%
70%
60%
50%
40%
30%
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20%
10%
0%
1999
2000
2001
2002
2003
2004
2005
Net International Debt Position in Percent of GDP
Source: Eurostat
Prof. Dr. Rainer Maure
2006
2007
2008
2009
2010
2011
2012
Total Government Debt in Percent of GDP
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The European Debt Crisis 2010
1. The Causes of the Crisis
Ireland
140%
Percent of GDP
120%
100%
80%
60%
40%
20%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
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-20%
-40%
-60%
Net International Debt Position in Percent of GDP
Source: Eurostat
Prof. Dr. Rainer Maure
Total Government Debt in Percent of GDP
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The European Debt Crisis 2010
1. The Causes of the Crisis
Greece
180%
Percent of GDP
160%
140%
120%
100%
80%
60%
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40%
20%
0%
1999
Source: Eurostat
Prof. Dr. Rainer Maure
2000 2001 2002 2003 2004 2005 2006
Net International Debt Position in Percent of GDP
2007 2008 2009 2010 2011 2012
Total Government Debt in Percent of GDP
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The European Debt Crisis 2010
1. The Causes of the Crisis
Germany
100%
Percent of GDP
80%
60%
40%
20%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
© RAINER MAURER, Pforzheim
-20%
-40%
-60%
Net International Debt Position in Percent of GDP
Source: Eurostat
Prof. Dr. Rainer Maure
Total Government Debt in Percent of GDP
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The European Debt Crisis 2010
2. Ho to overcome the crisis
➤ In the short run: What measures are necessary to overcome
the crisis?
■ The Governments of indebted countries have overtaken the
bad debt losses of the commercial banks in their countries.
This has caused an increase of the government indebtedness.
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◆
Prof. Dr. Rainer Maure
Debt restructuring (=„haircut“=partial bankruptcy) => Problem:
Loss of receivables of creditor banks endangers stability of the
financial sector („Lehman Brothers”-effect, “Banking Domino”)
◆ Budget reorganization with „ESM-credits“ => Will countries like
Greece, Portugal, Spain and Ireland be able to sustain the
consequences of austerity policies: violent protest rallies?
general strikes? Political stability strong enough?
◆ Up to know budget reorganization based on austerity policies has
not been very successful:
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4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.1. Die Ursachen der Krise
Greece
250.000
Million Euro
200.000
150.000
100.000
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50.000
0
1999
Source: Eurostat
Prof. Dr. Rainer Maure
2000 2001 2002 2003 2004
Total general government expenditure
2005 2006 2007 2008 2009
Total general government revenue
2010 2011
GDP
2012
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4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.1. Die Ursachen der Krise
Portugal
200.000
Million Euro
180.000
160.000
140.000
120.000
100.000
80.000
60.000
© RAINER MAURER, Pforzheim
40.000
20.000
0
1999
Source: Eurostat
Prof. Dr. Rainer Maure
2000 2001 2002 2003 2004
Total general government expenditure
2005 2006 2007 2008 2009
Total general government revenue
2010 2011
GDP
2012
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4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.1. Die Ursachen der Krise
Spain
1.200.000
Million Euro
1.000.000
800.000
600.000
400.000
© RAINER MAURER, Pforzheim
200.000
0
1999
2000
2001
2002
2003
2004
Total general government expenditure
Source: Eurostat
Prof. Dr. Rainer Maure
2005
2006
2007
2008
2009
Total general government revenue
2010
2011
2012
GDP
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4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.1. Die Ursachen der Krise
Ireland
200.000
Million Euro
180.000
160.000
140.000
120.000
100.000
80.000
60.000
© RAINER MAURER, Pforzheim
40.000
20.000
0
1999
2000
2001
2002
2003
2004
Total general government expenditure
Source: Eurostat
Prof. Dr. Rainer Maure
2005
2006
2007
2008
2009
Total general government revenue
2010
GDP
2011
2012
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4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.1. Die Ursachen der Krise
Germany
3.000.000
Million Euro
2.500.000
2.000.000
1.500.000
1.000.000
© RAINER MAURER, Pforzheim
500.000
0
1999 2000 2001 2002 2003 2004
Total general government expenditure
Source: Eurostat
Prof. Dr. Rainer Maure
2005 2006 2007 2008 2009
Total general government revenue
2010 2011
GDP
2012
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4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.2. Auswege aus der Krise
➤ Current situation:
■ As a result total government debt levels have become even
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larger and unemployment rates have reached levels that can
threaten political stability:
Prof. Dr. Rainer Maure
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4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.1. Die Ursachen der Krise
Portugal
250.000
18%
Million Euro
16%
200.000
14%
12%
150.000
10%
8%
100.000
6%
4%
© RAINER MAURER, Pforzheim
50.000
2%
0
0%
1999
2000
GDP
Source: Eurostat
Prof. Dr. Rainer Maure
2001 2002 2003 2004
Total Government Debt
2005 2006 2007 2008 2009
Unemployment Rate (right scale)
2010
2011
2012
- 29 -
4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.1. Die Ursachen der Krise
Spain
1.200.000
30%
Million Euro
25%
800.000
20%
600.000
15%
400.000
10%
200.000
5%
0
0%
© RAINER MAURER, Pforzheim
1.000.000
1999
2000
2001
GDP
Source: Eurostat
Prof. Dr. Rainer Maure
2002
2003
2004
2005
Total Government Debt
2006
2007
2008
2009
2010
2011
2012
Unemployment Rate (right scale)
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4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.1. Die Ursachen der Krise
Ireland
250.000
16%
Million Euro
Percent of Labor Force
14%
200.000
12%
10%
150.000
8%
100.000
6%
4%
© RAINER MAURER, Pforzheim
50.000
2%
0
0%
1999
2000
2001
2002
GDP
Source: Eurostat
Prof. Dr. Rainer Maure
2003
2004
2005
Total Government Debt
2006
2007
2008
2009
2010
2011
Unemployment Rate (right scale)
2012
- 31 -
4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.1. Die Ursachen der Krise
Greece
400.000
30%
Million Euro
350.000
25%
300.000
20%
250.000
200.000
15%
150.000
10%
© RAINER MAURER, Pforzheim
100.000
5%
50.000
0
0%
1999
2000
GDP
Source: Eurostat
Prof. Dr. Rainer Maure
2001 2002 2003 2004
Total Government Debt
2005 2006 2007 2008 2009
Unemployment Rate (right scale)
2010
2011
2012
- 32 -
4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.1. Die Ursachen der Krise
Germany
3.000.000
12%
Million Euro
10%
2.000.000
8%
1.500.000
6%
1.000.000
4%
500.000
2%
0
0%
© RAINER MAURER, Pforzheim
2.500.000
1999 2000
GDP
Source: Eurostat
Prof. Dr. Rainer Maure
2001 2002 2003 2004
Total Government Debt
2005 2006 2007 2008 2009
Unemployment Rate (right scale)
2010
2011
2012
- 33 -
4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.2. Auswege aus der Krise
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➤ Current situation:
■ 3 Years have passed by now, since the beginning of the crisis
■ Neither the ESM (European Stability Mechanism =„European
Prof. Dr. Rainer Maure
Rescue Fund“) nor the „Fiscal Compact“ had been able to
calm the markets.
■ Risk premiums for government bonds crisis country kept on
growing until summer 2012 (see next diagram).
■ Then, the president of the European Central Bank, Mario
Draghi, was able to trigger a turnaround of markets when he
declared “Within our mandate, the ECB is ready to do
whatever it takes to preserve the euro. And believe me, it will
be enough (…)”
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4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.2. Auswege aus der Krise
Zinsdifferenzen 10-jähriger Staatsanleihen im Vergleich zu Deutschland
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32
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
EZB LTRO: 21.12.11 & 29.02.12
Prozent
Gründung des
EFSF &
Beginn der
Griechenlandhilfen:
09.05.10
2010M01D04
2010M06D21
Irland
Portugal
Irland unter
unter EFSF:
EFSF:
07.04.11
28.11.10
Draghi "Whatever it takes.." 27.06.12
Bernanke
Congress
Rede:
22.05.13
2010M12D06
Griechenland
2011M05D23
Spanien
Quelle:
EUROSTAT, Zinssätze des "Maastricht-Kriteriums"
Prof. Dr. Rainer Maure
2011M11D07
2012M04D23
Italien
2012M10D08
Portugal
2013M03D25
Frankreich
2013M06D14
- 35 -
4.2.6. Die Schuldenkrise der EWU 2010
4.2.6.2. Auswege aus der Krise
➤ Current situation:
■ Currently, financial markets expect a turn of monetary policy in
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the USA.
■ As a result, market interest rates for bonds are growing and
with them risk premiums (see diagram).
■ As it seems, the situation could soon get critical again for the
European crisis countries.
Prof. Dr. Rainer Maure
- 36 -