Luc Riedweg June 1310

GIC Conference - Prague

June 14th 1

Central Banking in the Post Greece Crisis Period

Luc Riedweg

GIC Conference, Prague

Tuesday, June 14th, 2010


June 14th

Outline

2

Source : Bloomberg.

Latest actions of central banks and public authorities to contain

the tensions on financial markets

The challenges ahead for the global financial system


June 14th

Outline

3

Source : Bloomberg.

Latest actions of central banks and public authorities to contain

the tensions on financial markets



June 14th

2%

3%

4%

5%

6%

7%

8%

01/07 07/07 01/08 07/08 01/09 07/09 01/10

Germany

France

Italy

Spain

Netherlands

Belgium

Austria

Greece

Ireland

Portugal

Finland

Bond spread for several euro area countries widened

Even less vulnerable Banks countries were affected

Euro area 10Y interest rates during the four stages of the crisis

Sovereign debt tensions

4

Source : Bloomberg.

Financial crisis build-upSystemicoutbreak

Systemicresponse

Sovereignrisk


June 14th

Sovereign debt tensions

5

Source : Bloomberg.

CDS premia (bp)

Source: Bloomberg


June 14th

Spot libor-OIS has more than doubled since April

6

Source : Bloomberg.

0

10

20

30

40

50

60

07/09 10/09 01/10 04/10

Spread EURIBOR - swap OIS 3 mois

Spread LIBOR USD - swap OIS 3 mois

en bps

3-month Libor OIS spreads (bp)

Source: Bloomberg

3 months

3 months


June 14th

Public authorities’ response

7

Source : Bloomberg.

Securities Market Programme (SMP)

European Financial Stabilisation Fund (EFSF)

ECB/Fed swap dollar facility


June 14th

The functioning of the market for government bond iscentral to the transmission of the ECB’s policy rates

8

Price channel

Government bonds constitute the benchmark for pricing almost all loans to

the private sector

When risk premia become too large, the signal from the key policy rates

is no longer perceivable and does not reach the real economy

Liquidity

channel

Government bonds are often used as collateral for banks’ refinancing

operations

If government bond markets are disrupted, this hampers the functioning of the

interbank market and reduces liquidity in this market

Balance sheet

channel

Lower government bond prices imply valuation losses in the assets held by

the financial and non-financial sectors.

For banks, the lower capital base may mean that they can supply fewer

loans to the economy.


June 14th

Outline

9

Source : Bloomberg.

Latest actions of central banks and public authorities to contain the tensions

on markets



June 14th 10

Fragile conditions in the EU banking sector

Increase in cost of risk

+ 40%

+46%

0

20

40

60

80

100

120

Europe USA

EUR bn

2008 2009

Source : Financial reports


June 14th 11

20%

30%

40%

50%

60%

70%

80%

90%

100%

BN

PP

SG

DB

CS

UB

S

Sa

nta

nd

er

Ba

rcla

ys

RB

S

HS

BC

2008 2009

Fragile conditions in the EU banking sector

Provisions for non performing loans / Non performing loans

Source : Financial reports


June 14th

Upward pressure on interest rates: steepening of the 2Y-10Y spreads

What are the main drivers for the upcoming months?

Resurgence of interest rate riskRecent steepening of the yield curve

12

2Y-10Y spread – Bund 2Y-10Y spread – US Treasury

0bp

50bp

100bp

150bp

200bp

250bp

300bp

0%

1%

2%

3%

4%

5%

6%

01/07 07/07 01/08 07/08 01/09 07/09 01/10

Spread 2Y-10Y

2Y

10Y

0bp

50bp

100bp

150bp

200bp

250bp

300bp

0%

1%

2%

3%

4%

5%

6%

01/07 07/07 01/08 07/08 01/09 07/09 01/10

Spread 2Y-10Y

2Y

10Y

Source : Bloomberg.


June 14th

Macroeconomic environment

Improving growth likely to put pressure on returns…

…roughly cancelled out by the low inflation context

Imbalance between supply and demand

No structural imbalances anticipated between fixed income

supply and demand

UK stands for an exception (end of quantitative easing)

Sovereign risk

Deterioration in the sovereign risk could potentially triggered

sharp moves in long term rates

Increasing disparities within the Euro area and, more broadly,

at the global level

Expected evolutions of the yield curve Three sources of risk

13

Low risk

Medium risk

Potentially high risk


June 14th

A possible impact on long term yields due to the improving macroeconomicenvironment…

…should roughly be cancelled out by the low inflation context

Expected evolutions of the yield curve Downward pressure stemming from low inflation

14

Source : Consensus Economics.

Inflation – Consensus forecast end 2010 and 2011

2,29%1,99%

1,22%1,51%

2,6%

1,73%

0%

1%

2%

3%

4%

5%

2010 2011 2010 2011 2010 2011

United States Euro area United Kingdom

Consensus


June 14th 15

Banks’ refinancing risk

Average maturity and aggregate face amounts of Moody’s

rated Euro Area debt issuance


June 14th 16

Realized and Expected Writedowns orLoss Provisions for Banks by Region


June 14th 17

Macroeconomic risks in the GlobalFinancial Stability Map (IMF)


June 14th

Sovereign risks: transfer of risks to governementsbalance sheets


June 14th

Sovereign risks: increasing borrowing needs


June 14th 20

Sovereign risks & main contagion channels

Sovereign debt to GDP in the G7 Sovereign risks and spillover channels

Source : IMF GFSR

Luc Riedweg June 1310

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