ANNUAL REPORT 2008 - Polymer Bank Notes of the World

sponsored rescue plans were initiated for anumber of European financial institutions aswell. On both sides of the Atlantic governmentsand public institutions alike undertook anumber of measures aimed at stabilising thefinancial system. These measures includeddeposit guarantees to private account holders,bank recapitalisation measures and actions tostrengthen bank liquidity. In addition, majorcentral banks cut their policy rates amid theintensification of the financial turmoil and thedeterioration of the macroeconomic outlook.The decline in stock markets was compoundedby a decrease in actual and expected earningsgrowth on both sides of the Atlantic. BetweenDecember 2007 and December 2008, actualearnings growth, computed in terms of earningsper share of corporations listed in the DowJones EURO STOXX index, turned negative toaround -16%. Similarly, earnings expectationswere also sharply revised downwards. Theforecast annual growth rate of earnings pershare 12 months ahead fell from about 9% atthe end of December 2007 to around 1.6% atthe end of December 2008. The decrease in euroarea corporations’ profitability, together withnegative news from macroeconomic indicators,have weighed negatively on stock marketvaluations.Against a background of continued unrestin financial markets and deterioratingmacroeconomic conditions, stock markets werecharacterised by a high degree of uncertainty,as measured by the implied volatility extractedfrom stock options. Stock volatility wasespecially elevated during the major episodesshaking financial markets, i.e. in March andsince September (see Chart 14). Against thisbackdrop, it is likely that equity risk premia haveincreased both in the euro area and the UnitedStates, thereby contributing to depressing stockmarket prices.From a sectoral perspective, in both the euroarea and the United States stock prices in thefinancial industry suffered the heaviest lossesbetween December 2007 and December 2008,Chart 14 Implied stock market volatility(percentages per annum; five-day moving average of daily data)1009080706050403020100euro areaUnited StatesJapan2004 2005 2006 2007 2008100Source: Bloomberg.Notes: The implied volatility series reflects the expected standarddeviation of percentage changes in stock prices over a period ofup to three months, as implied in the prices of options on stockprice indices. The equity indices to which the implied volatilitiesrefer are the Dow Jones EURO STOXX 50 for the euro area, theStandard & Poor’s 500 for the United States and the Nikkei 225for Japan.declining by about 57% and 51% respectively.Stock prices in the non-financial sector also fellsignificantly, decreasing by around 41% in theeuro area and 36% in the United States.In early 2009 the deteriorating global economicoutlook as well as renewed concerns about thehealth of the financial system pushed stockprices further down. Between the end of 2008and 27 February 2009, the Dow Jones EUROSTOXX and the Standard & Poor’s 500 indicesdeclined by around 17% and 19% respectively.HOUSEHOLD BORROWING MODERATED FURTHERThe dynamics of household borrowing continuedto slow in the course of 2008, reflecting theimpact of factors such as tighter financingconditions, the weakening of economic prospectsand the ongoing moderation of housing marketdynamics.The annual growth rate of MFI loans tohouseholds, which were the main source of9080706050403020100ECBAnnual Report200847