ANNUAL REPORT 2008 - Polymer Bank Notes of the World

Chart B Government bond yield spreadsagainst German government bondsChart C Sovereign credit default swaps(daily data; basis points)(daily data; basis points)FranceGreeceItalyPortugalNetherlandsSpainBelgiumIrelandGermanyFranceGreeceItalyPortugalNetherlandsSpainBelgiumIreland350350450450300300400400250250350300350300200200250250150150200200100501005015010050150100500July2007Jan.2008July2008Jan.200900JulyJan.July2007 2008 2008Jan.20090Source: Thomson Financial Datastream.Note: Government bonds with a ten-year maturity.Source: Thomson Financial Datastream.Note: Credit default swaps with a five-year maturity.bonds are generally regarded as the most liquid of all the euro area government bonds, with theresult that these attracted most of the flight-to-quality flows, partly explaining the widening ofsovereign spreads vis-à-vis Germany even where countries were perceived as having an identicalor even a better fiscal outlook. 55 See the box entitled “Recent widening in euro area sovereign bond yield spreads” in the November 2008 issue of the ECB’s MonthlyBulletin.According to the European Commission’sestimates, the average structural budget balance(the cyclically adjusted balance excluding oneoffand other temporary measures) in the euroarea worsened in 2008 by 0.7 percentage pointto -2.3% of GDP. The deterioration in structuralbalances amounted to more than half of therise in the average government deficit, whichsuggests that cyclical conditions (on average)had a more limited impact. Moreover, there wasa favourable “composition effect”. The growthin tax-rich wages, salaries and (nominal) privateconsumption continued to support tax receiptsin some countries, despite the overall worseningeconomic situation. However, it should be notedthat structural balance estimates are subject toconsiderable uncertainty in the current situationand, in particular, may be revised at a later stage.Looking at individual countries, among the euroarea countries, only Cyprus, Luxembourg, theNetherlands and Finland met their medium-termbudgetary objective, while Spain and Sloveniamoved away from theirs.MEASURES IN RESPONSE TO THE FINANCIALCRISIS AND ECONOMIC DOWNTURNIn October 2008 the euro area countries andthe United Kingdom agreed on coordinatedaction to stabilise the financial sector, includingthe recapitalisation of financial institutionsand guarantees for loans and deposits, whichwas subsequently approved by the EuropeanECBAnnual Report200873