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Global financial crisis: An emerging European perspective

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Title: Global financial crisis: An emerging European perspective


1
  • Global financial crisis
    An emerging European perspective

Erik Berglof, Chief Economist, EBRD
2
Comparing to the Great Depression World
industrial production, now vs. then
Source Eichengreen, Orourke (2010)
3
Comparing to the Great Depression Volume of
world trade, now vs. then
Source Eichengreen, Orourke (2010)
4
Comparing to the Great Depression World
equity markets, now vs. then
Source Eichengreen, Orourke (2010)
5
Smaller economies, then and now
Czech and Slovak Republics
Belgium
Sweden
Poland
6
Outline
  • A bad crisis, but stopped in its tracks
  • Policy response strong, but left scars
  • Dealing with aftershocks
  • Unemployment
  • Fragile banks regulatory tsunami
  • Fiscal Greece, Eurozone
  • Altered prospects for emerging Europe and the
    Euro

7
The phases of the crisis
Source IMF
8
Phase 1 Financial crisis build-up
9
A fleeting moment of decoupling, followed by
precipitous recoupling
Industrial production 2007-2009 (y-o-y)
10
Phase II Systemic outbreak
11
Emerging markets more resilient
Average response of EMBI to daily changes in the
VIX during periods of financial volatility in
the United States
12
Crisis challengeSystemic problem systemic
response
Source Bankscope, bank websites
13
Phase III Systemic response
14
Crisis response massive, comprehensive and
coordinated
  • Domestic policies Massive in western Europe and
    mature in central and eastern Europe
  • Massive coordinated international support
  • IMF resources tripled from 250 to 750 bn
  • EU BOP support quadrupled from 12.5 to 50 bn
  • G20 capital to multilateral development banks
  • Parent banks maintained exposures
  • A new coordination platform Vienna Initiative

15
Magnitude of official support massive
Official support (percent of GDP)
16
Improvised response The Vienna Initiative
  • Fill institutional vacuum - coordinate
  • Bring together authorities (home and host)
  • Private and public sector
  • Incentivise banks to coordinate
  • Regulatory incentives (IMF/EU prog rams)
  • Contingent capital (Joint IFI Action Plan)
  • Naming/shaming (memoranda of understanding)
  • Intensify Information-sharing
  • Coordinate within IMF/EU programs IFI
    collaboration

17
Sudden Stop in Emerging Europe muted
Percentage changes in external assets of
BIS-reporting banks
18
Currency shooting avoided
Currency overshooting avoided
Nominal effective exchange rates
Current programs
Median and interquartile ranges
Past crises
19
Output drop deep, sudden, and varied
20
Phase IV Towards sovereign crises in advanced
economies?
21
Unemployment high - still rising in SEE and the
Baltics
Source CEIC.
22
Europes banks in unclear state
  • Weak balance sheets
  • Total loan write-downs (IMF USD 442 bn) higher
    unrecognised share than in other markets
  • Still net tightening (ECB lending survey)
  • Compounded by regulatory reform in full swing
  • Capital positions and liquidity costs for
    growth
  • Uncertainty over bank tax, requirements of bank
    restructuring, and collaboration between
    supervisors
  • Emerging Europe still depend on bank finance

23
Regulatory tsunami
  • Stronger financial regulation needed
  • Financial sectors must share eventual crisis
    costs
  • But
  • Timing in a world of multi-speed regional growth
  • May stunt market development (e.g., restricting
    liquidity risks and maturity transformation)
  • Regional differences lost in global regulation
    (cross-border banking worked for Emerging Europe
    before and during crisis, but not everywhere
    else)

24
Debt increase follows banking crisis
Cumulative increase in real public debt in the
three years following the banking crisis
Source Reinhart and Rogoff (2008)
25
What if the crisis had not happened?
26
Emerging Europe recovery lagging
27
Recovery lagging, particularly in south-eastern
Europe and the Baltics
SEE Compared to January, revised 2010 growth
down negative or flat growth projected for
Bulgaria and Romania.
Baltic countries growth outlook remains negative
on average
28
Why recovering more slowly?
  • Export dependence on EU limits export demand
  • Follows from exceptionally large output drops
  • High unemployment weighs on domestic demand
  • Risk perceptions, non-performing loans ? credit
    growth
  • Fiscal consolidation 2010-11 ? contractionary

29
U
Corporate credit stagnating/contracting
Corporate credit growth, Q3-09 to Q1-10,
annualised
Belarus
Serbia
Moldova
Croatia
Romania
Slovenia
Ukraine
Albania
Slovak Republic
Russia
Bulgaria
Estonia
Poland
Latvia
Lithuania
Hungary
Kazakhstan
GDP growth, Q4-09 to Q1-10, annualised
Source National authorities via CEIC data
service, EBRD staff calculations.
30
Large deficits lead to fiscal contractions
Source IMF, European Commission.
31
Emerging Europe out of sync
  • Slower monetary easing, but quicker fiscal exit
    in Eurozone premature for emerging Europe
  • Divergence also within Emerging Europe with some
    countries getting large capital inflows
  • Regulation with increased capital requirements
    risks coming too early

32
Is there a Phase V of sovereign crises in
emerging Europe?
33
Emerging Europe and the Eurozone
34
Eurozone at a crossroads
  • 750bn buys time to build fiscal sustainability
  • So far only 60bn not enough given pressures
  • ECB shift to purchases of sovereign debt critical
  • Large permanent mutual fiscal insurance mechanism
    with rigorously enforced rules
  • or a break up with unimaginable implications for
    European project

35
Eurozone as an optimal currency area
  • Optimal currency areas partly endogenous
  • Significant convergence since formation
  • Real business cycle
  • But also persistent or increasing differences
  • Diverging inflation gt real exchange rates
    misaligned

36
Eurozone as the end zone
  • Costs and benefits of accession shifted
  • (1) Costs of loss of flexibility and premature
    entry?
  • gt Prepare better (local capital markets)
  • (2) Commitment value of Euro anchor?
  • Benefits smaller
  • Uncertainty about rules and long-term future
  • Timing for entry more distant
  • gt Strengthen/clarify architecture

37
  • Thank you

38
Needed a new growth agenda
  • Safer growth after the great moderation
  • Medium term, counter-cyclical macro policies
  • Diversify funding sources - local capital markets
  • Diversify exports and develop intra-regional
    trade
  • Strengthened competitiveness
  • Preventing a rapid rise of wage costs
  • Stimulating firm entry and exit, and SME growth
  • Exploiting cost advantages in the periphery
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