Monthly Bulletin July 2009 - Banque de France

More documents

Recommendations

Info

ARTICLES THE IMPACT OF GOVERNMENT SUPPORT TO THE BANKING SECTOR ON EURO AREA PUBLIC FINANCES In the wake of the fi nancial turmoil, which escalated in September 2008, governments across Europe reacted swiftly to stabilise the fi nancial system. Many governments embarked on bank rescue packages aimed at restoring confi dence in the banking system and safeguarding the fl ow of credit. In addition, governments adopted fi scal stimulus measures aimed at stabilising the economy. This article analyses the impact of government support to the banking sector on euro area public fi nances and discusses its effects on fi scal sustainability. Against the backdrop of an unfavourable macroeconomic environment, rising defi cit and debt ratios and the budgetary risks discussed in this article, it is essential that governments make a strong and credible commitment to a path of fiscal consolidation which fully respects the provisions of the Stability and Growth Pact. This will preserve trust in the sustainability of public fi nances and will support both the recovery and long-term economic growth. 1 INTRODUCTION In the early stages of the financial crisis the implications for Europe were largely perceived as ultimately confined to a limited number of banks, 1 particularly those which were dependent on the wholesale markets for their financing or had either investments in structured finance products or substantial off-balance sheet structures. In September 2008, after the default of Lehman Brothers, the financial crisis intensified and an increasing number of European financial institutions experienced liquidity problems and were forced to undertake massive asset write-downs, with negative implications for their own credit quality. In response to the financial turmoil, at the ECOFIN Council meeting of 7 October 2008, the ministers of finance of the EU Member States agreed on common guiding principles to restore both confidence in and the proper functioning of the financial sector. It was agreed that national measures in support of systemic financial institutions would be adopted in principle for a limited time period and within a coordinated framework, while taking due account of the interests of taxpayers. Following the adoption of a concerted European action plan on 12 October 2008, euro area countries announced (additional) national measures 2 to support their financial systems and ensure appropriate financing conditions for the economy as a prerequisite for growth and employment. This article analyses the impact of government support to the banking sector on euro area public finances and the implications for fiscal sustainability. Bank rescue operations have affected public finances through their direct impact on government accounts. In addition to deficit and debt developments, the assessment needs to take account of governments’ contingent liabilities arising from the substantial state guarantees that have been provided. At the same time, developments in government bond yields for euro area countries have pointed to changing perceptions among investors with regard to countries’ creditworthiness. A comprehensive assessment of the implications of financial sector support for public finances also requires a forward-looking perspective. In particular, the exit strategies that governments will adopt once confidence in and the proper functioning of the financial sector have been restored, their success in recovering the fiscal costs and their determination to return to sound fiscal positions will determine the long-term impact on public finances. This article is structured as follows: Section 2 briefly reviews the experience of selected past banking crises with a focus on the tools of government intervention and their impact on public finances, taking account of the recovery 1 In the second half of 2007, IKB in Germany and Northern Rock in the United Kingdom had to be rescued as a consequence of the US sub-prime mortgage crisis. IKB suffered losses owing to its exposure to the US sub-prime mortgage market, whereas Northern Rock had difficulties in obtaining funding from the interbank market. 2 Between end-September and end-October 2008, ten euro area countries announced bank rescue packages. ECB Monthly Bulletin July 2009 63
of initial fiscal costs. Section 3 analyses the impact on government accounts of the interventions by euro area governments since September 2008. 3 Section 4 discusses developments in the government bond yields of euro area countries observed since the financial crisis intensified. Section 5 assesses the possible impact on the sustainability of euro area public finances. Section 6 concludes. 2 MEDIUM-TERM FISCAL COSTS OF SELECTED PAST BANKING CRISES This section provides an overview 4 of the common features of several past banking crises and government reactions in advanced economies. “Systemic banking crises” can be defined as periods in which both the financial and corporate sectors experience a large number of defaults and financial institutions and corporations face great difficulties in fulfilling contractual obligations and repaying debt on time. This determines a sharp increase in non-performing loans and all or most of the aggregate banking system capital is exhausted. Since the Second World War, systemic banking crises have been relatively rare occurrences in developed countries as compared with developing or emerging economies, where they have often been accompanied by currency or sovereign debt crises. In general, past banking crises tended to be local in nature and to be related to country-specific imbalances. In this respect, the recent period of financial turmoil is unprecedented owing to its global reach, and this limits the scope of comparability with past episodes. Banking crises frequently occurred in the aftermath of pro-cyclical policies and exceptionally fast credit growth. In some cases, banks took excessive risks (often in the real estate or stock markets) during periods of strong economic growth that materialised when the economy was hit by internal or external shocks. In other cases, crises were related to the excessive dependence of banks on short-term financing. Government intervention tended to be based on a combination of measures aimed at restoring confidence in the financial system and supporting the flow of credit to the domestic economy in order to prevent a credit crunch. A first line of defence usually consisted of a guarantee fund or a blanket guarantee. The nature of the guarantees varied depending on country-specific conditions. Capital injections were also provided to those institutions facing liquidity or solvency problems and for the purpose of restoring banks’ required capital ratios. In exchange, governments acquired ownership of bank shares or proceeded to outright nationalisation. Non-performing bank assets were, in some cases, removed from bank balance sheets and transferred to asset management companies, which would later sell these assets again. In the case of publicly-owned asset management companies, the proceeds from the sale of assets partially offset the fiscal costs related to government interventions. The estimated fiscal costs of direct government intervention in the banking sector vary substantially across studies depending on the methodology used for their derivation and the definition of fiscal costs. 5 Some studies recognise only government outlays as fiscal costs, whereas 3 The cut-off date for the data in this article is 29 May 2009. 4 For more detailed analyses, see G. Caprio and D. Klingebiel, “Bank Insolvencies: Cross-Country Experience”, World Bank Policy Research Working Paper No 1620, July 1996; L. Laeven and F. Valencia, “Systemic Banking Crises: A New Database”, IMF Working Paper 08/224, November 2008; F. Eschenbach and L. Schuknecht, “The fiscal costs of financial instability revisited”, ECB Working Paper No 191, November 2002; L. Jonung, J. Kiander and P. Vartia, “The great financial crisis in Finland and Sweden: The dynamics of boom, bust and recovery, 1985-2000”, European Economy Papers No 350, December 2008 and L. Jonung, “The Swedish model for resolving the banking crisis of 1991-93. Seven reasons why it was successful”, European Economy Papers No 360, February 2009; C. Reinhart and K. Rogoff, “The Aftermath of Financial Crises”, NBER Working Paper No 14656, January 2009. 5 Two approaches to estimating fiscal costs can be applied. The bottom-up approach sums up all government measures related to a crisis, although some of these measures are difficult to quantify, especially if they are carried out by institutions classified outside the general government sector. This approach was followed in L. Laeven and F. Valencia (2008) op. cit. The top-down approach starts with the government debt-to-GDP ratio before the crisis and assumes that any changes in the ratio are related to the financial crisis. This approach, which also includes debt changes which are unrelated to the crisis, is followed in C. Reinhart and K. Rogoff (2009) op. cit. 64 ECB Monthly Bulletin July 2009
Page 1 and 2:
EN 0712009 EUROPEAN CENTRAL BANK MO
Page 3 and 4:
© European Central Bank 2009 Addre
Page 5 and 6:
ABBREVIATIONS COUNTRIES LU Luxembou
Page 7 and 8:
Risks to the outlook for inflation
Page 10 and 11:
ECONOMIC AND MONETARY DEVELOPMENTS
Page 12 and 13:
ECONOMIC AND MONETARY DEVELOPMENTS
Page 14 and 15: ECONOMIC AND MONETARY DEVELOPMENTS
Page 66 and 67: others also take into account the r
Page 68 and 69: exceeds the market price, a capital
Page 70 and 71: 4 THE IMPACT ON GOVERNMENT BOND YIE
Page 72 and 73: yield differential to Germany despi
Page 74 and 75: 5 IMPLICATIONS FOR FISCAL SUSTAINAB
Page 76 and 77: THE IMPLEMENTATION OF MONETARY POLI
Page 78 and 79: to loans with shorter maturities to
Page 80 and 81: Chart 2 Average daily reserve surpl
Page 82 and 83: In pre-turmoil times, such allotmen
Page 84 and 85: Chart 5 US dollars provided by the
Page 86 and 87: in Chart 7, which shows that lendin
Page 88 and 89: Chart A The EONIA, the euro interba
Page 90: euro-denominated covered bonds issu
Page 93 and 94: Table 1 Two-group rotation system (
Page 95 and 96: for each governor; (ii) transparenc
Page 97 and 98: Chart C The three-group rotation sy
Page 99 and 100: 7. The share of each national centr
Page 102: EURO AREA STATISTICS ECB Monthly Bu
Page 105 and 106: 6.3 Change in debt S57 6.4 Quarterl
Page 107 and 108: 1 MONETARY POLICY STATISTICS 1.1 Co
Page 109 and 110: 1), 2) 1.3 Eurosystem monetary poli
Page 111 and 112: 2 MONEY, BANKING AND INVESTMENT FUN
Page 113 and 114: 2.3 Monetary statistics 1) (EUR bil
Page 115 and 116:
1), 2) 2.4 MFI loans, breakdown (EU
Page 117 and 118:
1), 2) 2.4 MFI loans, breakdown (EU
Page 119 and 120:
1), 2) 2.5 Deposits held with MFIs,
Page 121 and 122:
1), 2) 2.6 MFI holdings of securiti
Page 123 and 124:
2.8 Currency breakdown of selected
Page 125 and 126:
2.9 Aggregated balance sheet of eur
Page 127 and 128:
3 EURO AREA ACCOUNTS 3.1 Integrated
Page 129 and 130:
3.1 Integrated economic and financi
Page 131 and 132:
3.2 Euro area non-financial account
Page 133 and 134:
3.3 Households (EUR billions; four-
Page 135 and 136:
3.5 Insurance corporations and pens
Page 137 and 138:
4.2 Securities, other than shares,
Page 139 and 140:
4.3 Growth rates of securities, oth
Page 141 and 142:
4.4 Quoted shares issued by euro ar
Page 143 and 144:
4.5 MFI interest rates on euro-deno
Page 145 and 146:
4.6 Money market interest rates (pe
Page 147 and 148:
4.8 Stock market indices (index lev
Page 149 and 150:
5.1 HICP, other prices and costs (a
Page 151 and 152:
5.2 Output and demand 1. GDP and ex
Page 153 and 154:
5.2 Output and demand (annual perce
Page 155 and 156:
5.3 Labour markets 1) (annual perce
Page 157 and 158:
6.2 Debt 1) (as a percentage of GDP
Page 159 and 160:
6.4 Quarterly revenue, expenditure
Page 161 and 162:
7 EXTERNAL 7.1 Summary balance of p
Page 163 and 164:
7.2 Current and capital accounts (E
Page 165 and 166:
7.3 Financial account (EUR billions
Page 167 and 168:
Page 169 and 170:
Page 171 and 172:
7.5 Trade in goods 1. Values and vo
Page 173 and 174:
8 EXCHANGE 8.1 Effective exchange r
Page 175 and 176:
9 DEVELOPMENTS 9.1 In other EU Memb
Page 177 and 178:
LIST OF CHARTS C1 Monetary aggregat
Page 179 and 180:
Growth rates for intra-annual perio
Page 181 and 182:
k) l) a t = ⎛ ⎜ −1⎟×100
Page 184 and 185:
GENERAL NOTES The “Euro area stat
Page 186 and 187:
EURO AREA STATISTICS General notes
Page 188 and 189:
Page 190 and 191:
Page 192 and 193:
Page 194:
Page 197 and 198:
oth the marginal lending facility a
Page 200 and 201:
DOCUMENTS PUBLISHED BY THE EUROPEAN
Page 202 and 203:
DOCUMENTS PUBLISHED 89 “An analys
Page 204 and 205:
DOCUMENTS PUBLISHED “Euro area ba
Page 206 and 207:
GLOSSARY This glossary contains sel
Page 208 and 209:
GLOSSARY ERM II (exchange rate mech
Page 210 and 211:
GLOSSARY Investment funds (except m
Page 212:
GLOSSARY is determined on the basis
show all

Monthly Bulletin July 2009 - Banque de France

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?