SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Bank of Finland Bulletin 4/2011 Monetary policy and...
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Transcript of SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Bank of Finland Bulletin 4/2011 Monetary policy and...
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Bank of Finland Bulletin 4/2011
Monetary policy and the global economy
Governor
Erkki Liikanen
19 September 2011
1
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Themes
Global economic outlook weakened– Bank of Finland growth forecast for world economy revised
downwards– Risks of even weaker developments heightened
New phase in sovereign debt crisis– Countries’ own measures necessary but no longer sufficient
Confidence in financial institutions weakened– Demand for central bank credit increased again
Addressing uncertainty is pivotal
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Global economic outlook weakened:
forecast backround
3
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Market expectations of growth weakened
0
20
40
60
80
100
120
140
160
180
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2005 2006 2007 2008 2009 2010 2011
USA: 20-year bond yield Euro area: 20-year bond yield
USA: S&P 500 (rhs) Euro area: DJ euro, broad (rhs)
% 3 Jan 2005 = 100
Euro area real rate: real rate on French government bond.Source: Bloomberg.24114@Chart1 (2)
Share prices and real long-term interest rates
4
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Safe haven cosiderations also important
Safe haven instruments Risky instruments
0
1
2
3
4
5
6
2005 2006 2007 2008 2009 2010 2011
USA Germany Japan Switzerland
%
Source: Bloomberg.25107@10v. nimelliskorkoja(2)
Yield on 10-year government bonds
0
5
10
15
20
25
2008 2009 2010 2011
Greece Italy Ireland Portugal Spain Finland
% points
Ca 10-year government bond yield differential vs. Germany.Source: Bloomberg.25200@Spredit (enET)
Interest rate differentials in euro area
5
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Confidence indicators weakened
Manufacturing, spring Consumers, end of summer
25
30
35
40
45
50
55
60
65
2006 2007 2008 2009 2010 2011
USA Euro area Japan China Brazil
Balance
Lähde: Bloomberg.25200@PMI_teollisuus (enET)
PMI: manufacturing
-40
-35
-30
-25
-20
-15
-10
-5
0
20
30
40
50
60
70
80
90
100
2006 2007 2008 2009 2010 2011
USA Japan Euro area (rhs) United Kingdom (rhs)
Balance Balance
Source: Bloomberg.25200@Chart87 (enET)
Consumer confidence indicator
6
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
New phase in sovereign debt crisis
Previously concerned only individual countries – Greece, Ireland, Portugal
Problems in all major developed economic areas– Annual deficits elsewhere even greater than in the euro area
Confidence weakened broadly during summer– US debt ceiling negotiations– European crisis management systems
7
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Phases of the sovereign debt crisis
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Global economic outlook weakened:
Bank of Finland forecast
9
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
What are the consequences of the confidence crisis for global economic growth?
Market indicator changes comparable to situation at end of spring 2010, some comparable even to the previous crisis
Uncertainty is already reflected in real economy
The longer uncertainty prevails, the greater the implications
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Channels for spread of crisis of confidence to real economy
Uncertainty leads to defensive behaviour– More saving, consumption and investment both suffer– Global interdependencies increase the repercussions
Financing more costly and harder to get– Equity finance more costly– Longer-term debt finance also more costly Investments not made on the basis of bank loans
Market-indicator-based probability of European banking crisis has risen– At worst, rumours become self-fulfilling
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
GDP in major economic areas
60
80
100
120
140
160
180
200
96
98
100
102
104
106
108
110
2005 2006 2007 2008 2009 2010 2011
USA EU20 Japan China (rhs) Brazil (rhs)
2005/I = 100 2005/I = 100
EU20 = Euro area, United Kingdom, Sweden and Denmark.Sources: National statistical authorities, ECB, Bloomberg ja Bank of Finland.25200@BKT_taso_EU20 (enET)
GDP
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
GDP 2010 2011f 2012f 2013fUSA 3,0 1,5 1,9 2,6
(2,8) (2,7) (2,9) (3,0)EU20 1,7 1,6 0,9 1,7
(1,7) (1,3) (1,6) (1,8)Japan 4.0 -0,6 2,4 1,3
(4,4) (1,1) (1,2) (1,3)China 10,3 9,0 8,0 8,0
(10,0) (9,0) (8,0) (8,0)Russia 4,0 4,4 4,4 3,6
(4,5) (5,4) (4,7) (4,1)World 5,2 3,9 3,6 4.0
(5,0) (4,2) (4,1) (4,2)World trade 13,5 6,2 6,1 7,1
(13,6) (7,6) (7,1) (7,3)
% change on previous year (previous forecast).EU20 = Euro area, Sweden, Denmark and United KingdomSource: Bank of Finland
Bank of Finland forecast for world economy
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Risks to the forecast on the downside
14
Forecast assumption: weakening of confidence comes to a halt– Heightened risk aversion fades
If this not possible, the worst scenario:– New global economic recession– Broad-based banking crisis
Factors affecting the severity of downside outcome+ Corporate sector and bank balance sheets mainly satisfactory
+ Central bank liquidity windows are available- Economic policy room for maneuvre limited- Confidence in decision making under strain
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Confidence in financial institutions weakened
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Majority of European banks passed the stress test
-5 %
0 %
5 %
10 %
15 %
20 %
25 %
Lähde: EBA.
5% threshold
-5 %
0 %
5 %
10 %
15 %
20 %
25 %
Source: EBA.
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
However, banks have medium- and long-term funding falling due
0
200
400
600
800
1000
1200
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Euro area United Kingdom Other Europe
EUR bn
* Situation at 6 Sept. 2011. Chart includes 50 largest European banks.Source: Bloomberg.
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Sovereign debt crisis is reflected in thebanking sector
18
0
50
100
150
200
250
300
350
400
450
500
1/2007 1/2008 1/2009 1/2010 1/2011
BNP Paribas Credit Agricole Societe GeneraleDeutsche Bank Commerzbank Intesa SanpaoloUnicredit BBVA Santander
Basis points
Source: Bloomberg.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Spreads between secured and unsecured interest rates in the euro area have increased again
19
0.0
0.5
1.0
1.5
2.0
2.5
1/2007 1/2008 1/2009 1/2010 1/2011
1-month spread 3-month spread 12-month spread
%
Interest rate spread as the difference between Euribor and Eurepo rates.Source: Reuters.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Excess deposits become the thermometer of the financial crisis
-50
0
50
100
150
200
250
300
350
1/2007 7/2007 1/2008 7/2008 1/2009 7/2009 1/2010 7/2010 1/2011 7/2011
Excess liquidity* in euro area banking sector (30-day moving average)
*Reserve holdings - minimum reserve requirements + overnight deposits - marginal lendingSource: Bank of Finland.
Eur bn
20
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Eurosystem policy rate and money market rates
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
01/08 07/08 01/09 07/09 01/10 07/10 01/11 07/11
ECB policy rate Eonia Euribor 3 months Euribor 12 months
Source: Bloomberg
%
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
What if markets demand larger capital buffers for banks?
-5 %
0 %
5 %
10 %
15 %
20 %
25 %
Lähde: EBA.
5% threshold
-5 %
0 %
5 %
10 %
15 %
20 %
25 %
Source: EBA.
22
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
What if markets demand larger capital buffers for banks?
-5 %
0 %
5 %
10 %
15 %
20 %
25 %
Lähde: EBA.
8% threshold
-5 %
0 %
5 %
10 %
15 %
20 %
25 %
Source: EBA.
23
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Summary: How to get out of the crisis?
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
How to get out of the crisis?
Debt crisis in a new phase– No longer a problem of individual countries– Threat of a new global recession is real
Capitalisation of financial institutions– Confidence in financial institutions weakened– Capitalisation the most effective way to restore confidence– Primarily a task of shareholders
Addressing uncertainty is pivotal– Increased loss of confidence in Europe’s ability to handle the crisis– Concrete measures essential– Implementation of July 21 decisions crucial
25
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Thank you!
26