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Monetary policy, deleveraging and soundness of banks in the Eurozone and SE Europe. Prof. Dr. Gligor Bishev. Current crisis. Despite two and a half years of good statistics, the growth had not recovered on permanent basis
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Prof. Dr. Gligor Bishev
Unconventional operations of FED
Corporate debt to GDP
Retail debt to GDP
7.0Deleveraging in Euro areaIndebtedness of the public and private sector
As it can be seen from the table, indebtedness is a feature of high developed countries. The ten high developed countries have debt to GDP ratio above 80% except Spain where public debt is 60 percent of GDP. In three countries, the debt to GDP ratio exceeds 100%: Italy 119%, Japan 223%, Greece 143%, and in other three the debt exceeds 90% - Portugal, Iceland and USA. These are countries that most likely will undergo the process of deleveraging. Data also indicate a very high likelihood for ten sectors in the five economies to undergo the process of deleveraging. Those are: the retail loans in Spain (82% of GDP), UK (94% of GDP), USA (86% of GDP), Portugal (89% of GDP) and Ireland (110% of GDP) and the corporate loans in Spain (147% of GDP), UK (106.4% of GDP) and Portugal (104% of GDP). Certainly, these are only rough estimates of the volume and sectors that would require a decrease of the debt. A more comprehensive analysis would require inclusion of many other indicators (for extensive analysis see in McKinsey Global Institute, 2010)
The “belt-tightening” model was by far the most commonly used in the period after the Great Depression. This model has been used in one half of all deleveraging episodes. If today’s economies were to follow this model, that would mean increase in interest rates, decrease of the private aggregate consumption, increase of savings and deleveraging. The fiscal policy will have to eliminate the budget deficits immediately. Under such scenario, the deleveraging would last almost a decade and would lead to contraction of economic activity within the first two to three years. The economic growth would renew after the third year. The deleveraging would start two years after the crisis. From present perspective, such scenario is very unlikely, as it would require a restrictive monetary and fiscal policy leading to new recession and increase of the unemployment in the short run.
Prolonged depression that will be caused if “belt-tightening” measures are in pace only, determine many economists, world wide to prescribe following medicine for deleveraging:
Fiscal austerity measures
Higher inflation generated by loose monetary policy
Partial debt write offs
2011 EU-wide stress test
The main objective of the EUR-wide stress test was to regain that shattered confidence in the stability and resilience of the banking systems
2011 EU-wide stress test- assumptions
The stress test results showed that eight banks fall below the 5% (tier 1 ratio) benchmark in the adverse scenario, with an overall shortfall of EUR 2.5 bn. (four banks from Spain, two banks from Greece, one bank from Austria and one bank from Germany)
However, the added value of the performed stress test assessments is questionable. The 2011 EU-wide stress test was criticized by analysts for not including the assumption of mark to market valuation of sovereign debt instruments
latest estimates indicate that if the banking sectors assets are adjusted for the market value of the Sovereign debt instruments, most of the global banks present In EU will have to be recapitalized . The estimate is that the “haircuts” of the present value of the sovereign debt would decrease the capital of KBC by 87%, Commerzbank by 64%, UniCredit by 63%, Barclays by 63%, Societe Generale by 51%, Deutsche Bank by 48%, Raiffeisen Bank International by 38%, BNP Paribas by 11% and BBVA by 4% (Financial Times, October 6, 2011, p. 4). In order significant reduction of the real GDP growth to be avoided, the recapitalization should be done fast, in package for all banks, similar as the process of recapitalization made in USA during 2009
FED consistently trough conventional and unconventional measures was stimulating the personal consumption (after the crisis in 2008) which enabled the USA economic recovery to be viable
ECB monetary policy was looking for long term strategy for stimulating the private consumption which resulted with short term swings of the Monetary policy which created uncertainty about the long term credit and money supply growth. Generating sustainable economic growth will require clear long term strategy for credit and money supply growth and long term interest rates.
Precondition for recovery of credit growth in EU on pre crisis level is cleaning up banks balance sheet and recapitalization of all globally active banks.
For all countries of SEE, irrespective of the exchange rate regime, EUR is the main nominal anchor and the monetary policy stance depends on Euro area monetary developments. On short run the credit growth will depend on capital inflows and the possibility to borrow internationally. In the case of Bulgaria and Romania and partly Albania and Serbia tackling NPLs and strengthening banks capital will have the most significant influence on future credit growth.
Thank you for your attention