das euro boot take away copy
TRANSCRIPT
The Banking €risis and the Euro
DAS euro BOOT
τὸ Α καὶ τὸ Ω € Krise: Banking, Trade & Growth?
Robert McDowellBanking Expert & Macroeconomist (Edinburgh)
貴社ますますご盛栄のこととお慶び申し上げます。平素は格別のご高配を賜り、厚く御礼申し上げます。
Freudenstadt Konferenz 2-4 July 2010
DAS euro BOOT Krise ?Airlock panic
• EA sub stuck in ocean mud: who can escape via the airlock?
• Or, who or what can be jettisoned out the torpedo tubes?
• Break-up of Euro: stories start flooding in January 2010
• March: „Die Griechen sollten den Euro verlassen?“
• FT: Greece‟s best option: default & leave ?
• May-July: FT posits Germany leaving EA !
• Soros: rät Deutschland zu einem Austritt aus der Euro-Zone
• Sarkozy: a menacé de sortir la France de l’euro pour sauver la Grèce, selon Zapatero, cité par El Pais
• Jean-Claude Trichet: “world faces a second Lehman” hours before EU leaders launched their €720bn (£612bn) defence fund. If ECB President is correct, we are in trouble (Daily Telegraph).
• “EU-IMF package unraveling. What will West do next?”
• June: Die Welt: “Deutschland sollte die Währungsunion verlassen „?
• Panic ? = safety within borders? „every man (state) for himself“!
I
LOGGED IN THE WARD ROOM
1. EU/EA Stabilisation fond?
• Haiku van Rompuy*/ plus heads of state 7th May/ meet a new deal to agree
• President Rompuy/ & 3 Spanish econ grads/ PR 2 am, 10th May
• Announce fund set up/ €720 billions/ for state-aid loan grant bail-outs
• SPV format/ Bankruptcy Remote concept?/ to assure wolfpack markets?
• Big as an IMF if/ but no board, bank account, or…/ vaunting Barroso** power?
• Normally takes years/ e.g. EIB – EBRD / guile sans skill: amateur hour!
• Sub-rosa: it‟s TARP again/ will MEPs play Congress/ vote a slice plus oversight?
____________________________________________________________
* Van Rompuy Presidency 2009-2012
Invented “asymmetrical translation” e.g. European Council = "le gouvernement économique“ / "economic governance"
** Barroso Commission 2004 -2014 incompetently desperate to get hold of a major reserve fund
II
Wolf pack v. euroConvoyAtlantic War new game version?
• Market Speculators „Wolf Pack“• $tens billions of profit plays• Players choose save or destroy € euro-system• Investors briefings on € /EA break-up:
– Sell Belgium, Spain, Greece, Portugal stocks– Buy Bunds, sell Dax (DM? Exports )– Buy Italian stocks (Lira? Exports )– France neutral (hold, subject to downward revision)– Buy $, £ (safe havens) &– leverage & arbitrage derivatives & shorting Euro & banks: big money
gains for hedge funds?
III
EU/EA crisis
a crisis of mixed metaphors
• EU 3 P‟s: Prejudice, Prudence, or Profligacy?
• EU 3 C‟s: Capital, Credit, or Competitiveness?• EU 3 B‟s: Budget, Balance, or Bankruptcy?
• not about moral virtues (that‟s callous political spin)
• it‟s EU jigsaw of trade, payments & bank lending • each member finds its own efficient growth path• they cannot all follow export-led or credit boom or a mix
• EU = different economies united, not a single economy!
• EU/EA system has to embrace economic risk diversity!• EU/EA is world economy scaled 1/3; it is not a single economy state
IV
Eine Reise ans Ende des Verständnis
6
Provocations 1
POLITICAL-ECONOMICS IS A SCIENCE… OF PROPAGANDA OTHERWISE IT IS A SOCIAL SCIENCE
SYSTEM OF ECONOMIC ACCOUNTING
• Public finances are not “in a mess” !
• …unless private finances are a Greek Tragedy?
• Countries perforce have different growth strategies
• Export-led growth forces others into credit-boom & vice versa
– New fashion ignored external accounts & their financing for „money supply‟
(so-called „new paradigm‟ for growth = „credit-boom‟ growth?)
– Extreme imbalances in world trade: credit-boom / export-led economies = net financial assets = payments deficit/surplus = pay for trade deficits & finance credit boom = asset bubbles & growing banks‟ funding gaps
– High bank funding cost wiped out net interest income = Credit Crunch
= trigger of Anglo-Saxon recession & temporary global shock
1a
Provocations 2
• Bank lending patterns dictate GDP growth strategies• Economies not made safe merely by balanced budgets!• Crowding Out theory = myth of public/private competition• Other „crowding out‟ = real problems in composition of bank
lending: earnings v. property as borrower collateral• Lower public deficits = lower private surpluses• Micro-model theories = macro-stupid!• Savings, growth, competitiveness, productivity, & zero-sum
ideas are entirely different at– macro & micro levels– domestic & international levels
1b
In the Conning tower
• PRIMITIVE visual GUIDANCE CONTROL SYSTEM
• Authorities* have no macro-economic models for analysing Finance in detail!
• Basel II tasked banks to build such systems; they didn‟t, couldn‟t, wouldn‟t!
• For factors– Dictating the Credit Crunch or
– Measuring interventions or
– Understanding banks in economies, or
– Income, trade, payments in growth!
• & not now (despite G20 tasks that assume such models exist!)
• Most effort is in behavioural games theory models!
• Economics as double-entry accounting standards was lost to politics
• Econ teaching is empirically poor, math-algorithmic absurd bubble!
• Mythos of “hard choices”: but can refinancing & recovery be self-financing?
• Governments cannot agree a self-financing painless path?
_________________________________________________________
* Central banks, government finance ministries, regulators, major banks, NGO banks2
Multi-national sovereignEURO SYSTEM DESIGNED TO BE PROOF AGAINST MARKETS
NOW DEPTH CHARGED by markets & gunslinger politicians
Causes- Not GOVERNMENT DEBTS (political not technical problems)- OPPOSING (complementary) INTRA-EU external accounts- CREDIT BOOM v. EXPORT-LED v. MIXED MODERATE states
Effects- PIGS‟ external deficits cannot be funded without fiscal austerity?- Bond markets impose higher margins on CB deficit states &- countervailing v.low margins on external EL surplus states- Credit-Crunch scandal effectively replayed at Governments - hits banks again & other sectors but now per sovereign borders.
3
EURO SYSTEM-KRISE
Maastricht SGP too crude
ENGINE ROOM ENGINE ROOM
BLINDBLIND OR BLINKEOR BLINKERED?RED??
4
Traditional economists’ view:
financial sector should not have macro-economic significance
Is this- MAD, LAZY, FOOLISH, DANGEROUS and/or
Irresponsible- BANKS DIDN‟T KNOW OR CARE EITHER WAY !
Regulation- BASEL II brilliantly DESIGNED TO CURE THIS, BUT PILLAR II of it NOT COMPLETED BY ANY BANKS!
WHO SETS COURSE HEADINGS?
5
Composition of bank lending reflects, causes & amplifies a country‟s growth choice (export-led EL, credit-boom, CB or a mix?)(Not discussed in debates among economists, regulators, governments, or media. )
Export-led Germany & others (also China): 60% lending to business, capital investment & trade = low consumer & mortgage lending.
High deficit credit-boomers: UK, Greece and Spain, banks‟ customer lending is 60-70% to mortgages & property (also USA).
Bank lending in both EL & CB states is risky because banks do not diversify across whole economy.
Bank balance sheets are as fragile in EL as in CB countries!
UK & De bank lending
„crowding out’ in bank lending?
4
UK customer loans = 165% /GDP ratio (€2.5tn, $3.5tn)
De customer loans = 78% /GDP ratio (€2.3tn, $3.2tn)
UK mortgages ($2.1tn) = 58% of loans, > 75% residential
De mortgages = ($1.53tn) = 44% of loans, < 50% residential
UK h‟hold loans ($1.95tn) = 55% of loans (87% / GDP)
De h‟hold loans ($1.39tn) = 55% of loans (43% / GDP)
Bank credit support
or not for
INDUSTRY & TRADE?
5
UK loans businesses = 45% customer loans (but 50% = com. mortgages & property)UK non-property loans = 23% of cust. loans or 37% /GDP.De loans to industry = 56% or 44% / GDP of which 25% is mortgages/property.
UK tradable goods industry sectors get bank credit = 5% /GDPDe industry loans = 33% /GDP, of which tradable goods = 30% /GDP
UK (non-financial) business output = £590bn (£300bn services, £290bn industry, of which manufacturing £240bn). nf all business incl. services bank borrowing = £900bn = 152% /sector GDP, or 76% ratio (excluding commercial mortgages )
De domestic bank credit excl. mortgages to German industry = 163% of sector GDP UK figure is 76% of industry sector GDP.
UK banks extend $100bn of credit to support $350bn exports = 28% ratioDe banks extend $620bn credit supporting $1.5tn exports = 41% ratio
Debt burden on De industry
& banks
6
High exposure by DeDe banks to industry (business loans are lowest margins) = DeDe sovereign debt spreads v. critical to banks‟ net interest income = in EA sovereign debt crisis
DeDe priority = De De sovereign debt needs far lower risk margin than other EU sovereigns! Or, banks & corporates risk insolvency losses.
LOGIC BEHIND MERKEL‟S TOUGH-LOVE STANCE IN
EA SOVEREIGN DEBT DISPUTE?
DeDe BANKS VULNERABLE TO CREDIT DEFAULTS AS TRADE & MARGINS FALL & BANKS TO REFINANCE €0.5tn IF CANNOT
GET LOWEST RATES!?
7
DeDe industry's debts= 160% /industry’s gross outputDeDe industry debt servicing =10% / gross operating surplusGDP forecasts are 1/3 lower than UK
UK industry debt servicing = 4% / gross operating surplus,Debt servicing for all UK business = 13% /profit in ‟08 & 9% in ‟09GDP forecasts are sharply higher than DeDe
In „04-‟08 EL‟s GDP grew fastestnow endogenous CB‟s GDP higher in medium term… except EA‟s PIIGS!
Die Die HeimatHeimat gefährdetgefährdet ??
Sovereign bonds spreads & yields for years 2007 –2010 /German
Bund
Sovereign debt prices directly influence banks‟ & corporates‟ credit status & debt costs, not just government borrowing cost!
De in EUEU/EA/EA
9
De trade & surplus = same size as China‟s60% is intra-EU but De ex-EU trade surplus halves EU external deficit
De in EAnf private sector lending = 22% of EA totalLending to business = 25% of EA total nf customer lending = 21% of EA total
despite nf private customer lending in EA = 107%/GDP compared to De = 78% /GDP
De economy in EA is like USA % in worldUSA in the world is an extreme credit boom economyDe in Europe is an extreme export-led economy____________________________________________________nf = non-finance sector (business excluding banks etc.)
Greece extreme credit boomer
10
0
5
10
15
20
25
30
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Greek Banks' Loans by Sector as % ratios to GDP
Tourism Services Industry Shipping
Consumer Other Personal Res.Housing Finance
GREECE FOLLOWED
OTHERS „ MODELS -IRELAND, UK, USA, SPAIN & PRAISED IN EU
FOR HIGH GROWTH
CONTRIBUTION TO EU
FOR YEARS!
RECESSION WIPED OUT
90% OF GREEK BANK
CAPITAL. BUT THAT IS ON
A PAR WITH UK, USA, OTHERS‟ BANK CAPITAL
IMPACTS.
Competitiveness: reality & illusion
11-150
-125
-100
-75
-50
-25
0
25
50
75
100
125
150
175
200
225
250
275
2007 2008 2009
GERMANY
FRANCE
UK
ITALY
SPAIN
NETHERLANDS
POLAND
AUSTRIA
DENMARK
GREECE
PORTUGAL
FINLAND
IRELAND
CZECH
SLOVAKIA
LUXEMBOURG
-100
-75
-50
-25
0
25
50
75
100
125
150
175
200
225
250
275
300
2007 2008 2009
GERMANY
FRANCE
UK
ITALY
SPAIN
NETHERLANDS
POLAND
AUSTRIA
DENMARK
GREECE
PORTUGAL
FINLAND
IRELAND
CZECH
SLOVAKIA
LUXEMBOURG
EU Trade Balances$ billions
EU Balance of Payments
$ billions
Credit boom V. export led
12
14000
15000
16000
17000
18000
19000
20000
2005 2006 2007 2008 2009
CB
EL
GDP of 6 Credit Boom CB economies incl. USA and UK v. GDP of 10 Export Led EL economies incl. Japan, Germany &China.$ billions
credit-boom: USA, UK, Spain, others
export-led: China, Germany, Saudi Arabia, Netherlands, Russia, S.Korea, others
modest mix: France, Italy, Belgium, Switzerland, RSA, Mexico, othersstrong mix: India, Brazil, others
0
10,000
20,000
30,000
40,000
50,000
60,000
2000 2002 2003 2004 2005 2006 2007 2008
Households
Non-financial business
All public sector
Financial firms
Rest of the world
$ Bn US banks flowof funds by sector
Note dependence of inter-bank lending in USA to household mortgage and consumer lending.The opposite prevails in export-led where inter-bank lending is tied to business lending.
COMPARING BANK LENDINGUSA & prCHINA
13
$ trillion roundedDec.’09 % GDP
Bank & other lending 21.3 150Financial 4.0
Enterprises 4.84.8Loans & corp. bonds 3.2
Commercial mortgages 1.6
Real estate 2.6
Households 14.0 102Of which mortgages 10.8
Consumer credit & lease finance 3.2
Bank & Other Liabilities 21.3 150Non-financial Deposits 7.3 50
Money Market depos 3.0
Trading 0.8
Central bank 2.3
Other 2.6
Banks reserve capital 1.1Equity 1.5
Inter-bank debt 3.7
$ trillion rounded Dec.’09
%
Increase
in ‘09
Bank Deposits 9 27.7
Of which: By enterprises 3.3 36.5
By households 3.9 19.5
Of which: Rmb
Deposits 3.8 19.7
By Government1.8
Foreign
currency
Bank Lending 6.36.3 33.0
Of which: Short-term 2.2 17.7
longer-term3.5 43.5
FC Reserve loaned to banks 2.4 600Other 0.6
Of which: Enterprises 4.84.8
Households 1.2
Other 0.3
USA economy 5-7 times bigger than PR China (depending on whose adjusted GDP figures)USA bank lending = 150%/GDP, China = 2-300%/GDP. China lending to industry (half of which is funded by loans of
all of China‟s foreign reserves) matches the total for the USA i.e. China‟s industry is severely over-borrowed and the economy is vulnerable to downturn in world trade and fall in net exports (& commercial property collapse?).
Some more comparisons
14
USAUSA65% of credit to households,22% to medium & large Enterprises10% to small firms incl. self-employed.70% of total exposure is property-related,This chimes with UK, Spain, Greece, Ireland.
PR CHINA75% loans to business19% to householdsnf firms debt =173% /total outputNet debt of enterprises =114% /output!Households borrow 30% of h‟hold deposits.
UK & USAUSA lending to h‟holds = 100%/GDPof which 70% = residential mortgages
China h‟hold loans =25%/GDP mortgage & consumer finance are small.
UK banks lend too much to h‟holds for property (70% /total customer loans) Manufacturing (17%/GDP export 13%/GDP) =3.5% business loans (1.5%/GDP) Construction (5%/GDP) = 4.5% /business loans (=2%/GDP)Small firms & self employed get 1.5% of all loans yet employ 50% priv. sector jobs!
GermanGerman banks loan too much to industry at 56% / total customer lending29% /business loans are to small firms & self-employed =10 x UK %.
Back to port sovereign debt &
Euro system 1
15
Banks & EU states need government borrowing to - boost private sector assets & reflate economies- improve quality & quantity of banks‟ capital reserves- finance trade deficits
Fiscal & Monetary measures - are clutch & accelerator pedals, not steering wheel- do not restructure, or- change type of economic growth direction- we leave steering to banks & free market - who do not navigate on basis of national macro economics
Back to port sovereign debt & Euro system II
15
Maastricht Criteria /EU’s Growth & Stability Pact
- Ceilings & hurdles to cap member states‟ borrowingin reference only to GDP ratios !
- Other factors ignored incl. bal. of payments (anomaly Ireland: economy far smaller than its GDP?)
- Only gross not net National Debt- Deficit & debt ratios scaled to GDP (not GNP) &
don‟t take account of ext. trade & payments(supposed benign intra-EA & EU but Greece shows not so)
- Ignores currency of debt & private debt levels, & domestic versus foreign ownership of debt (EA=domestic?)
Back to port sovereign debt & Euro system III
15
Solving EU/EA Sovereign Debt Crisis requires system to:- Recognise differing/opposing growth stances e.g. CB & EL, &- Intra-EU/EA imbalances, on & off government budgets- Regulatory supervision to compel banks to rebalance lending.- Does not directly require aligning tax or fiscal stances.
26
Concludings A-E (time permitting?)
unsere Krise riskiert eine riesigeSicherheitskatastrophe
A
•• DeDe was in heart of EUEU, „generous’ to secure Europe.
•• DeDe is the protagonist in Euro Krise, bringing integration into a crunching of gears.
• € incomplete : monetary union sans political union, ECBsans central treasury (not insoluble).
•• EAEA states are alone on sovereign debt weakened sanstreasury money market flexibility.
•• ECBECB accepts sovereign debt of all EAEA equally, same interest rate as Germany, but not a solution.
• Banks loaded up with PIIGSPIIGS‟ debt until 2010.
A
B
• After Sept. „08, EUEU Council guarantee no big banks will default. DeDe insists each state to care for its own.
• Capital moves with guarantees, interest-rate differences in EAEA stay small.
• Hungary & Baltic states rescued.• As markets cage-rattle sovereign debt, interest-rate
differentials widen. •• GreeceGreece the battleground.•• EUEU authorities slow. EAEA members hold opposing views.•• DeDe insists on S&GS&G Pact‟s Pact‟s “no bail-outs”.•• GreekGreek crisis festers, contagion spreads.
B
C
•• EUEU forced into bigger rescue package than if it‟d reacted quicker.
• Markets see terms as punitive, fiscal consolidation harder, can‟t see how PIIGSPIIGS can fly:
• Close trade deficits & revive growth sans currency depreciation? (Euro system break-up) or risk deflation.
• Can push EUEU into long stagnation (late „90s early „00s) = social unrest (at worst, xenophobic extremism).
•• DeDe has major responsibility as biggest trade surplus, most creditworthy country (externally, not internally)
C
D
•• DeDe unwittingly imposes deflation on EAEA (itself included & next recession imminent).
•• DeDe public cannot see the harm because of how the €works. Soros says, “deflation will serve to make Germany more competitive on world markets, while pushing the weaker countries further into depression and increasing the burden of their debt”.
• No, this is a two-sided coin; DeDe will also fall.
D
E
• If DeDe left €, Dm would soar, €€ & DeDe exports plummet.
•• Rest of Europe Rest of Europe more competitive to grow its way out but Germany crucified by overvalued currency (like Japan).
•• DeDe trade balance evaporates, businesses default & unemployment soars (extreme political crisis).
•• DeDe Banks require v.large injections of gov. funds.
• Hypothetical - if DeDe left €€, consequences are immense, unthinkable beyond making sure this cannot happen!
E
32
€€ötterdämmerungötterdämmerung darfdarf nichtnicht wahrwahr seinsein
schonschon amam EndeEnde vomvom €€uro BOOT?uro BOOT?