Download New phase in sovereign debt crisis

Bank of Finland Bulletin 4/2011
Monetary policy and the global economy
Governor
Erkki Liikanen
19 September 2011
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
1
Themes
 Global economic outlook weakened
– Bank of Finland growth forecast for world economy revised
downwards
– Risks of even weaker developments heightened
 New phase in sovereign debt crisis
– Countries’ own measures necessary but no longer sufficient
 Confidence in financial institutions weakened
– Demand for central bank credit increased again
 Addressing uncertainty is pivotal
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
2
Global economic outlook weakened:
forecast backround
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
3
Market
of growth
weakened
Shareexpectations
prices and real long-term
interest
rates
USA: 20-year bond yield
USA: S&P 500 (rhs)
4.5
Euro area: 20-year bond yield
Euro area: DJ euro, broad (rhs)
3 Jan 2005 = 100
180
%
4.0
160
3.5
140
3.0
120
2.5
100
2.0
80
1.5
60
1.0
40
0.5
20
0.0
0
2005
2006
2007
2008
2009
2010
2011
Euro area real rate: real rate on French government bond.
Source: Bloomberg.
24114@Chart1 (2)
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
4
Safe haven cosiderations also important
Interest rate differentials in euro area
Yield
on 10-year
government
bonds
Safe
haven
instruments
USA
6
Germany
Japan
Risky instruments
Greece
Switzerland
%
25
5
Italy
Ireland
Portugal
Spain
Finland
% points
20
4
15
3
10
2
5
1
0
0
2005
2006
Source: Bloomberg.
25107@10v. nimelliskorkoja(2)
2007
2008
2009
2010
2011
2008
2009
2010
2011
Ca 10-year government bond yield differential vs. Germany.
Source: Bloomberg.
25200@Spredit (enET)
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
5
Confidence indicators weakened
Consumer
confidenceend
indicator
Consumers,
of
Manufacturing,
spring
PMI:
manufacturing
USA
65
Euro area
Japan
China
USA
Brazil
Balance
100
Japan
Euro area (rhs)
summer
United Kingdom (rhs)
Balance
Balance
0
60
90
-5
55
80
-10
50
70
-15
45
60
-20
40
50
-25
35
40
-30
30
30
-35
25
20
-40
2006
2007
Lähde: Bloomberg.
25200@PMI_teollisuus (enET)
2008
2009
2010
2011
2006
2007
2008
2009
2010
2011
Source: Bloomberg.
25200@Chart87 (enET)
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
6
New phase in sovereign debt crisis
 Previously concerned only individual countries
– Greece, Ireland, Portugal
 Problems in all major developed economic areas
– Annual deficits elsewhere even greater than in the euro area
 Confidence weakened broadly during summer
– US debt ceiling negotiations
– European crisis management systems
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
7
Phases of the sovereign debt crisis
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
8
Global economic outlook weakened:
Bank of Finland forecast
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
9
What are the consequences of the confidence crisis
for global economic growth?
 Market indicator changes comparable to situation at
end of spring 2010, some comparable even to the
previous crisis
 Uncertainty is already reflected in real economy
 The longer uncertainty prevails, the greater the
implications
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
10
Channels for spread of crisis of confidence
to real economy
 Uncertainty leads to defensive behaviour
– More saving, consumption and investment both suffer
– Global interdependencies increase the repercussions
 Financing more costly and harder to get
– Equity finance more costly
– Longer-term debt finance also more costly
 Investments not made on the basis of bank loans
 Market-indicator-based probability of European
banking crisis has risen
– At worst, rumours become self-fulfilling
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
11
GDPGDP in major economic areas
USA
110
EU20
Japan
China (rhs)
2005/I = 100
Brazil (rhs)
2005/I = 100
200
108
180
106
160
104
140
102
120
100
100
98
80
96
60
2005
2006
2007
2008
2009
2010
2011
EU20 = Euro area, United Kingdom, Sweden and Denmark.
Sources: National statistical authorities, ECB, Bloomberg ja Bank of Finland .
25200@BKT_taso_EU20 (enET)
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
12
Bank of Finland forecast for world economy
GDP
USA
EU20
Japan
China
Russia
World
World trade
2010
3,0
(2,8)
1,7
(1,7)
4.0
(4,4)
10,3
(10,0)
4,0
(4,5)
5,2
(5,0)
13,5
(13,6)
2011f
1,5
(2,7)
1,6
(1,3)
-0,6
(1,1)
9,0
(9,0)
4,4
(5,4)
3,9
(4,2)
6,2
(7,6)
2012f
1,9
(2,9)
0,9
(1,6)
2,4
(1,2)
8,0
(8,0)
4,4
(4,7)
3,6
(4,1)
6,1
(7,1)
2013f
2,6
(3,0)
1,7
(1,8)
1,3
(1,3)
8,0
(8,0)
3,6
(4,1)
4.0
(4,2)
7,1
(7,3)
% change on previous year (previous forecast).
EU20 = Euro area, Sweden, Denmark and United Kingdom
Source: Bank of Finland
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
13
Risks to the forecast on the downside
 Forecast assumption: weakening of confidence comes to
a halt
– Heightened risk aversion fades
 If this not possible, the worst scenario:
– New global economic recession
– Broad-based banking crisis
 Factors affecting the severity of downside outcome
+
+
-
Corporate sector and bank balance sheets mainly satisfactory
Central bank liquidity windows are available
Economic policy room for maneuvre limited
Confidence in decision making under strain
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
14
Confidence in financial institutions weakened
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
15
Majority of European banks
passed the stress test
25 %
20 %
15 %
10 %
5% threshold
5%
0%
-5 %
Source:
EBA.
Lähde:
EBA.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
16
However, banks have medium- and long-term
funding falling due
Euro area
1200
United Kingdom
Other Europe
EUR bn
1000
800
600
400
200
0
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
* Situation at 6 Sept. 2011. Chart includes 50 largest European banks.
Source: Bloomberg.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
17
Sovereign debt crisis is reflected in the
banking sector
BNP Paribas
Deutsche Bank
Unicredit
500
Credit Agricole
Commerzbank
BBVA
Societe Generale
Intesa Sanpaolo
Santander
Basis points
450
400
350
300
250
200
150
100
50
0
1/2007
1/2008
1/2009
1/2010
1/2011
Source: Bloomberg.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
18
Spreads between secured and unsecured interest
rates in the euro area have increased again
1-month spread
2.5
3-month spread
12-month spread
%
2.0
1.5
1.0
0.5
0.0
1/2007
1/2008
1/2009
1/2010
1/2011
Interest rate spread as the difference between Euribor and Eurepo rates.
Source: Reuters.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
19
Excess deposits become the thermometer of
the financial crisis
Excess liquidity* in euro area banking sector (30-day moving average)
350
Eur bn
300
250
200
150
100
50
0
-50
1/2007 7/2007 1/2008 7/2008 1/2009 7/2009 1/2010 7/2010 1/2011 7/2011
*Reserve holdings - minimum reserve requirements + overnight deposits - marginal lending
Source: Bank of Finland.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
20
Eurosystem policy rate and
money market rates
ECB policy rate
6.0
Eonia
Euribor 3 months
Euribor 12 months
%
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
01/08
07/08
01/09
07/09
01/10
07/10
01/11
07/11
Source: Bloomberg
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
21
What if markets demand
larger capital buffers for banks?
25 %
20 %
15 %
10 %
5% threshold
5%
0%
-5 %
Source:
EBA.
Lähde:
EBA.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
22
What if markets demand
larger capital buffers for banks?
25 %
20 %
15 %
8% threshold
10 %
5%
0%
-5 %
Lähde: EBA.
Source:
EBA.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
23
Summary: How to get out of the crisis?
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
24
How to get out of the crisis?
 Debt crisis in a new phase
– No longer a problem of individual countries
– Threat of a new global recession is real
 Capitalisation of financial institutions
– Confidence in financial institutions weakened
– Capitalisation the most effective way to restore confidence
– Primarily a task of shareholders
 Addressing uncertainty is pivotal
– Increased loss of confidence in Europe’s ability to handle the crisis
– Concrete measures essential
– Implementation of July 21 decisions crucial
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
25
Thank you!
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
26