Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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