Annual Financial Statements 2008 of Bank Austria

As a result of the sharp rise in commodity prices and fairly resilient
growth in the first six months, inflation (HCPI) in the euro area
reached 4.0 % in June 2008. Prompted by fears of excessive inflation,
the ECB raised key interest rates one last time to 4.25 % at the
beginning of July. When it became clear that the European economy
could not uncouple itself from global developments, and the primary
objective of economic policy was to resolve the banking crisis, the
ECB lowered key interest rates in four stages to 2.25 % at the end of
the year (currently 1.5 %). The money market followed suit, although
credit spreads were exceptionally high.
Flat yields on 10-year benchmark bonds, still 4.66 % in the middle of
2008, fell faster than money market rates to 2.93 % at the end of the
year due to strong demand from risk-averse investors. This resulted in
a variety of interest rates that matched the respective bond ratings.
Even within the euro area, credit spreads of government bonds of
highly indebted countries reached unprecedented levels. Yields of corporate
bonds rose significantly in October: at the end of 2008, yields
of BBB-rated bonds were about 1.5 percentage points above the level
at the beginning of the year. This increase in the credit spread corresponded
to more than double the interest rate reduction of benchmark
government bonds. Lending rates (over and beyond increased
corporate risk) were subsequently accompanied by higher liquidity
and funding costs of the banking sector, which were partly absorbed
by margins.
� Austria felt the full impact of the global economic downturn later
in the year: in the fourth quarter of 2008, Austria’s economic performance
shrank for the first time in 30 quarters. As economic trends
in Austria follow international developments with some time lag, the
quarter-on-quarter decline of 0.2 % was significantly lower than in the
euro area. Real GDP in 2008 as a whole still grew by 1.8 %, driven by
the strong momentum early in the year. However, the Austrian economy
was increasingly impacted by the sharp decline in global
demand via the export-oriented industrial sector with its close links as
a supplier. Towards the end of 2008, exports fell at double-digit rates
compared with the previous year. Industrial companies strongly
reduced output, cut investment and started to adjust employment.
The year-end 2008 number of unemployed persons exceeded the
December 2007 level by more than 30,000 or 12 %. Supported by the
significant decline in inflation, to a level of 1.3 % in December 2008,
private consumption continued to grow in the fourth quarter, though
at a moderate rate. In 2008, the inflation rate averaged 3.2 % and
private consumption rose by 1 %. The savings ratio continued to grow
from quarter to quarter – as it usually does in times of uncertainty –,
rising to an annual average of over 12.3 %.
Loss of confidence in interbank markets
Interbank/central bank funds
(3-month Libor/3-month OIS)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Higher credit spreads
800
700
600
500
400
Turnaround in currency markets
1.15
1.25
1.35
1.45
1.55
Economic downturn and oil price
1,000
800
600
400
200
0
80
60
40
20
Shipping Futures
(Baltic Dry Index)
Credit Default Swaps
(iTraxx Crossover, 5yr)
Emerging markets (EMBI+)
bond yields; benchmark spread
Euro
US dollar
BBB corporate bond yields;
benchmark spread
Spillover to emerging markets (regional MSCI indices)
100
Emerging Asia
JPY per EUR
(inverted scale)
USD per EUR
(inverted scale)
London Brent
Crude Oil USD/bl.
World stock index
Emerging Europe
Q1 Q2 Q3 Q4 Q1
2008 2009
Bank Austria · Annual Financial Statements 2008
900
800
700
600
500
400
300
200
100
125
135
145
155
165
175
140
120
100
80
60
40
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