ANNUAL REPORT 2008 - Polymer Bank Notes of the World

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sharp depreciation of the euro was associatedprimarily with a revision of market expectationsabout the euro area economic outlook – as thefinancial crisis continued to unfold and its globalreach gradually began to be realised – and tookplace within an environment of heightenedmarket uncertainty and global risk aversion.Towards the end of the year, the euro reboundedstrongly, reaching another historical peak on18 December 2008. By the end of 2008 theeuro was, in nominal effective terms, about2.5% higher than at the beginning of the yearand about 7% above the average level in 2007.Much of the nominal effective appreciationof the euro in 2008 can be accounted for byits sizeable strengthening against the poundsterling, which was only partly counterbalancedby the euro’s weakening against the US dollarand the Japanese yen.Against the US dollar, the euro underwent astrong appreciation in the first eight months ofthe year, peaking in mid-July at USD 1.60. Thisappreciation was driven largely by expectationsof a widening interest rate differential in favourof euro area assets, reflecting market beliefsthat the euro area was going to be affected bythe ongoing financial turmoil to a significantlylesser extent than the United States. From thatperiod on, however, data releases began to showthat the financial turmoil that originated in thesub-prime US mortgage market in August 2007was unfolding into a synchronous economicslowdown across all main economic areas. As aresult, the euro began to depreciate sharply againstthe US currency in August. In the course of theautumn, renewed strains in global money andcredit markets intensified the downward pressureon the euro, with the single currency reachingUSD 1.25 in October. This sizeable depreciationwas associated partly with a worldwide dollarliquidity shortage which commanded a sizeablerepatriation of foreign investments and concertedcentral bank policy actions. In this environment ofextremely heightened risk aversion and financialdeleveraging, the US dollar found support in itsinternational status. Other technical, and possiblytransitory, factors in foreign exchange marketsalso appear to have lent support to the US dollar,as can also be deduced from the weakening ofthe link between interest rate differentials andmovements in the EUR/USD exchange rateduring this period. In December, however, theeuro experienced a strong rebound as the strengthof the above-mentioned non-cyclical factors thatsupported the dollar in the autumn waned andforeign exchange markets refocused attention onthe growth outlook and interest rate differentialsacross major economic areas. On 31 Decemberthe euro was trading at USD 1.39, i.e. about 5%weaker than at the beginning of 2008 and about6% stronger than its 2007 average.Following a similar pattern to the EUR/USDexchange rate, the euro also fluctuated widelyagainst the Japanese yen in the course of 2008,trading within an unusually wide range ofJPY 115.75 and JPY 169.75. The volatilityin the EUR/JPY exchange rate seems to havereflected not only a changing market assessmentof relative economic prospects, but mostimportantly market expectations relating to assetprice volatility. As a consequence, the latter hadan impact on the expected profitability of carrytrades, i.e. trades that consist of borrowing ina low-yielding currency (such as the yen) andinvesting in a high-yielding currency. In general,an increase in the expected volatility of the yenreduces its attractiveness as a funding currencyfor carry trades, tending to put upward pressureon the yen and downward pressure on highyieldingcurrencies. Indeed, implied volatilityin the EUR/JPY exchange rate – as measuredthrough indicators based on option prices – sawwide gyrations in the course of 2008, peakingin October and subsiding thereafter. Theseextremely volatile conditions in the foreignexchange market accounted mostly for the initialappreciation and subsequent sharp depreciationof the euro against the yen in 2008. On31 December 2008 the euro traded at JPY 126.14,i.e. 23% weaker than at the beginning of the yearand about 22% lower than its 2007 average.The euro also continued to appreciate againstthe pound sterling in 2008, strengthening bya sizeable 28.5% by the end of the year, afterthe 9% appreciation witnessed in 2007. OnECBAnnual Report200879
Chart 33 Current account balance and itscomponents(annual data; EUR billions)100806040200-20-40-60-80-1002005200620072008CurrentaccountGoods Services Income CurrenttransfersSource: ECB.Note: Data for 2008 refer to the year to October.100806040200-20-40-60-80-10029 December the euro traded at GBP 0.98,the highest level since the launch of the singlecurrency in 1999. The noticeable weakeningof the pound, particularly in the last monthsof 2008, relates to the significant slowdown ineconomic activity in the United Kingdom, whichtriggered a sizeable easing of monetary policyconditions and an associated fall in longer-termyields.The euro appreciated significantly againstthe currencies of several EU trading partnereconomies between early January and31 December, for example by 15.3% againstthe Swedish krona, 15.3% against the Polishzloty, 12.3% against the Romanian leu, 5.3%against the Hungarian forint and 1.9% againstthe Czech koruna. A sizeable strengtheningwas also witnessed vis-à-vis the Korean won(33.6%), the Norwegian krone (22.1%) andthe Australian and Canadian dollars (21.0%and 17.1% respectively). The appreciationof the euro against these currencies wascounterbalanced partly by its weakeningagainst the currencies of several Asianpartners whose currencies are linked to the USdollar, namely the Chinese renminbi (11.4%)and the Singapore and Hong Kong dollarsChart 34 Euro area export volumes toselected trading partners(indices: Q1 2004 = 100; seasonally adjusted; three-monthmoving average)18016014012010080extra-euro areaUnited StatesUnited KingdomOPECAsiaCEECs2004 2005 2006 2007 2008180160140120100Source: ECB.Notes: Last observation refers to December 2008 except forextra-euro area and the United Kingdom (November). “CEECs”stands for central and eastern European countries.(5.2% and 6% respectively). The euro also lostground against the Swiss franc (10.2%) amidpositioning in and out of carry trades, giventhat the Swiss franc, like the Japanese yen,played the role of funding currency in this formof financial transaction.The real EER, based on different cost and pricemeasures, appreciated in the first four monthsof 2008 and then stabilised until August.After declining until November it reboundedsomewhat in the last month of 2008. In the lastquarter of 2008 the real EER of the euro, basedon consumer prices, was 2% below its averagevalue in 2007 and 4% below its average level inthe corresponding quarter of 2007.CURRENT ACCOUNT SHIFTED INTO DEFICIT IN 2008In 2008 the current account of the euro arearecorded a deficit of €63.2 billion (or 0.7% ofeuro area GDP), compared with a surplus of€36.3 billion in 2007. This resulted largelyfrom the goods balance shifting into deficit.In 2008 the goods balance recorded a deficitof €0.6 billion, compared with a surplus of€56.6 billion in 2007. The weakening ofexports, particularly in the second half of theyear, together with a robust increase in import8080 ECBAnnual Report2008
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EN2008EUROPEAN CENTRAL BANK ANNUAL
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© European Central Bank, 2009Addre
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CHAPTER 4FINANCIAL STABILITY AND IN
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7 Statistical accounting consequenc
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ABBREVIATIONSCOUNTRIESOTHERSBE Belg
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in the course of the year, in line
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currencies, T2S will be a major ste
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CHAPTER 1ECONOMICDEVELOPMENTS ANDMO
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Chart 1 ECB interest rates and mone
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Despite moderating, the annual grow
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substantial downward revisions in r
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in July, annual inflation in the OE
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As regards the Chinese economy, rea
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generally tighter financing conditi
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Page 32 and 33: was driven mainly by developments i
Page 34 and 35: market tensions, particularly for l
Page 36 and 37: anking and financial system. At the
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Page 44 and 45: September onwards, amid the great u
Page 46 and 47: Chart C Trading volumes for governm
Page 48 and 49: sponsored rescue plans were initiat
Page 50 and 51: The annual growth rate of consumer
Page 52 and 53: end of 2007. By December 2008 this
Page 54 and 55: calculated as the balance between g
Page 56 and 57: commodity prices (see Box 4). Conve
Page 58 and 59: Chart D Longer-term inflation expec
Page 60 and 61: apidly to 1.7% in December, mainly
Page 62 and 63: productivity slowed to 0.2% in the
Page 64 and 65: Table 3 Composition of real GDP gro
Page 66 and 67: Corporate investment, which had exp
Page 68 and 69: Box 5LABOUR MARKET DEVELOPMENTS IN
Page 70 and 71: Chart C Breakdown of employment gro
Page 72 and 73: Box 6DEVELOPMENTS IN THE ISSUANCE A
Page 74 and 75: Chart B Government bond yield sprea
Page 76 and 77: Box 7STATISTICAL ACCOUNTING CONSEQU
Page 78 and 79: warranted because of the need to co
Page 82 and 83: prices in the first eight months of
Page 84 and 85: focused more on the production rath
Page 86 and 87: segments and, in turn, affected eur
Page 88 and 89: and Bulgaria registered robust grow
Page 90 and 91: In the remaining non-euro area EU c
Page 92 and 93: Estonian kroon and the Lithuanian l
Page 94 and 95: Table 10 Official monetary policy s
Page 96 and 97: the Bank of England and Sveriges Ri
Page 98 and 99: CHAPTER 2CENTRAL BANKOPERATIONSAND
Page 100 and 101: Box 10MONETARY POLICY OPERATIONS DU
Page 102 and 103: Chart A Liquidity supply through op
Page 104 and 105: franc funding needs of banks with n
Page 106 and 107: MINIMUM RESERVE SYSTEMCredit instit
Page 108 and 109: with the ample allotments in the fi
Page 110 and 111: 2008. By contrast, the average shar
Page 112 and 113: and SDR holdings increased by aroun
Page 114 and 115: and the ECB). As a result of carefu
Page 116 and 117: cross-CSD settlement. T2S will thus
Page 118 and 119: ELIGIBLE LINKS BETWEEN NATIONAL SEC
Page 120 and 121: Chart 48 Number of euro banknotes i
Page 122 and 123: 3.3 BANKNOTE PRODUCTION AND ISSUANC
Page 124 and 125: 4 STATISTICSThe ECB, assisted by th
Page 126 and 127: iii) payments statistics and iv) de
Page 128 and 129: 5 ECONOMIC RESEARCHThe main functio
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were organised to disseminate resea
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the Financial Collateral Directive,
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on the Banque centrale du Luxembour
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standards by individual Eurosystem
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CHAPTER 3ENTRY OF SLOVAKIAINTO THE
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Table 13 Main economic indicators f
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As of January 2009 Slovakia is thus
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3 OPERATIONAL ASPECTS OF THE INTEGR
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4 THE CASH CHANGEOVER IN SLOVAKIATH
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Willem F. Duisenberg accepting the
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1 FINANCIAL STABILITYThe Eurosystem
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With regard to merger and acquisiti
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with the principles set out in Octo
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2.2 BANKINGCAPITAL REQUIREMENTS DIR
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3 FINANCIAL INTEGRATIONThe Eurosyst
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The market for short-term paper in
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de France and the Banca d’Italia.
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and the Eurosystem’s business con
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4.2 RETAIL PAYMENT SYSTEMS ANDINSTR
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for Clearing and Settlement, and th
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Willem F. Duisenberg at his farewel
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1 EUROPEAN ISSUESIn 2008 the ECB co
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for financial institutions, to faci
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1.3 DEVELOPMENTS IN AND RELATIONS W
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On a number of occasions in 2008, t
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countries have voiced support for t
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Former Italian President Carlo Azeg
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1 ACCOUNTABILITY VIS-À-VIS THE GEN
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implementation of the steps foresee
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CHAPTER 7EXTERNALCOMMUNICATION
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2 COMMUNICATION ACTIVITIESThe ECB a
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Panel at the Fifth ECB Central Bank
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1 DECISION-MAKING BODIES AND CORPOR
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Council decided on the main aspects
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1.3 THE EXECUTIVE BOARDThe Executiv
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1.4 THE GENERAL COUNCILThe General
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The Eurosystem/ESCB committees have
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members of the Executive Board. 13
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for their current position. On the
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statistical office (Statistisches B
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4 ANNUAL ACCOUNTS OF THE ECB212 ECB
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function, and by the Governing Coun
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BALANCE SHEET AS AT 31 DECEMBER 200
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PROFIT AND LOSS ACCOUNT FOR THE YEA
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mid-market prices on 30 December 20
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The defined benefit obligation is c
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NOTES ON THE BALANCE SHEET1 GOLD AN
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Eurosystem (see “Banknotes in cir
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(see “Banknotes in circulation”
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values at which the transactions we
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15 CAPITAL AND RESERVESCAPITALPursu
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epresenting the remainder of its ca
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NOTES ON THE PROFIT AND LOSS ACCOUN
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individual circumstances. Basic sal
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5 CONSOLIDATED BALANCE SHEET OF THE
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ANNEXES
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Number Title OJ referenceECB/2008/1
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Number Title OJ referenceECB/2009/1
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Number 2 Originator SubjectCON/2008
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Number 4 Originator Subject OJ refe
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oth the marginal lending facility a
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OVERVIEW OF THE ECB’S COMMUNICATI
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y the respective NCBs will also be
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OPEN MARKET OPERATIONS BY CURRENCYE
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USD operationsType oftransaction 1)
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DOCUMENTS PUBLISHED BY THEEUROPEAN
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95 “Financial stability challenge
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1012 “Petrodollars and imports of
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GLOSSARYThis glossary contains sele
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Economic analysis: one pillar of th
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Financial stability: condition in w
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MFIs (monetary financial institutio
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Reserve base: the sum of the eligib
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ANNUAL REPORT 2008 - Polymer Bank Notes of the World

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