Kryzys fiskalny w Europie Strategie wyjścia Ryszard Petru dyrektor ds. strategii główny ekonomista BRE Banku 110 seminarium BRE-CASE Warszaw awa, 30 września 2010 1
Outline Pre-crisis - Loose fiscal policy in some European countries - No reaction to violation of Stability and Growth Pact - Falling competitiveness of some EU economies Crisis - Additional generous anti-crisis fiscal stimulus - Delayed market signals - Blind rating agencies 2
Agenda 1. Governments 2. Supervisory institutions: European Commission 3. Financial markets, rating agencies 3
1. Governments 2. Supervisory institutions: European Commission 3. Financial markets, rating agencies 4
Fiscal crisis emerged from financial crisis 5-Y EUR CDS rates (bps) 1000 900 Financial crisis Stabilization Fiscal crisis 800 700 600 500 Lehman Brothers bankruptcy Dubai on the verge of bankruptcy 400 \ 300 200 100 0 09-08 12-08 03-09 06-09 09-09 12-09 03-10 06-10 09-10 Greece Spain Portugal Italy Poland Germany Source: Bloomberg. 5
Large divergence of fiscal policies within the EU Budget deficit (% GDP) and GDP growth (%) 8,0 Finland 8,0 Greece - - -8,0-8,0-12,0-12,0-16,0 2001 2002 2003 2004 2005 2006 2007 2008 Budget deficit (% GDP) GDP growth (%) -16,0 2001 2002 2003 2004 2005 2006 2007 2008 Budget deficit (% GDP) GDP growth (%) 8,0 Germany 8,0 Hungary - - -8,0-8,0-12,0-12,0-16,0 2001 2002 2003 2004 2005 2006 2007 2008 Budget deficit (% GDP) GDP growth (%) -16,0 2001 2002 2003 2004 2005 2006 2007 2008 Budget deficit (% GDP) GDP growth (%) Source: Eurostat. 6
GDP fall and loose fiscal policy led to sudden fiscal deterioration 55.0 Revenues and expenditures of general government (% GDP) Greece Spain 55.0 50.0 50.0 45.0 45.0 40.0 40.0 35.0 35.0 30.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 30.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 55.0 Expenditures UK Revenues 55.0 Expenditures Poland Revenues 50.0 50.0 45.0 45.0 40.0 40.0 35.0 35.0 30.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 30.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Expenditures Revenues Expenditures Revenues Source: Eurostat. 7
resulting in excessive budget deficits Budget deficit (% GDP) 16,0 1 +14.4 +8.5 Change of budget deficit between 2007 and (% GDP) 12,0 +13.1 1 +6.8 +8.7 +7.9 8,0 6,0 +5.2 +4.9 +5.8 +5.2 +3.8 EU average 2,0-1.0 +3,5 +4.3 IRE GRE SPA POR LAT LIT POL SLO BEL CZE ITL HUN GER EST Source: Eurostat. 8
and sharp rise of public debt Public debt (% GDP) 12 +12.3 +19.4 Change of public debt between 2007 and (% GDP) 10 8 6 4 +12.5 +12.4 +13.2 +8.2 EU average +39.0 +17.0 +6.0 +27.1 +12.5 +6.4 +12.4 2 +3.4 ITL GRE BEL HUN POR GER IRE SPA POL LAT SLO CZE LIT EST Source: Eurostat. 9
Without fiscal consolidation debt will continue rising Forecast of public debt to GDP ratio under various budget deficit levels* 120 Poland 120 Hungary 100 80 60 40 20 0 120 100 80 60 40 20 0 2010 2010 2011 ` Czech Rep. ` 2012 2013 2014 2015 2016 2017 2018 2019 2020 5% GDP 3% GDP 1% GDP 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 5% GDP 3% GDP 1% GDP 100 80 60 40 20 0 120 100 80 60 40 20 0 2010 Germany 2011 2012 2013 2014 2015 * Under the assumption of GDP growth rate at its long-term level (IMF estimates). Source: IMF WEO April 2010, Eurostat, BRE estimates. ` 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 5% GDP 3% GDP 1% GDP ` 2016 2017 2018 2019 2020 5% GDP 3% GDP 1% GDP Hungary has been tightening fiscal policy within its agreement with the IMF. Germany is threatened with faster public debt growth than CEE countries due to its lower potential GDP growth it has already taken steps to reduce budget deficit (national debt brake rule). 10
1. Governments 2. Supervisory institutions: European Commission 3. Financial markets, rating agencies 11
Persistent violation of S&GP and no reaction from the EU 120.0 110.0 100.0 90.0 80.0 70.0 60.0 50.0 2000 2001 2002 Budget balance and government debt (% GDP) Germany Greece 2003 2004 2005 2006 2007 2008 4.0 2.0 0.0-2.0-4.0-6.0-8.0-10.0-12.0-14.0-16.0 Maastricht level (3% GDP) Maastricht level (60% GDP) 120.0 110.0 100.0 90.0 80.0 70.0 60.0 50.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 4.0 2.0 0.0-2.0-4.0-6.0-8.0-10.0-12.0-14.0-16.0 120.0 Budget balance (RA) Italy Government debt (LA) 4.0 2.0 120.0 Budget balance (RA) Government debt (LA) Hungary 4.0 2.0 110.0 100.0 90.0 0.0-2.0-4.0-6.0 Maastricht level (3% GDP) 110.0 100.0 90.0 0.0-2.0-4.0-6.0 80.0-8.0 80.0-8.0 70.0 60.0 50.0 2000 2001 2002 2003 2004 2005 2006 2007 2008-10.0-12.0-14.0-16.0 Maastricht level (60% GDP) 70.0 60.0 50.0 2000 2001 2002 2003 2004 2005 2006 2007 2008-10.0-12.0-14.0-16.0 Budget balance (RA) Government debt (LA) Budget balance (RA) Government debt (LA) Source: Eurostat. 12
Greece submiting data of questionable quality 0 Budget balance reported by Greece vs. Eurostat estimates from 2010 (% GDP) -2-4 Maastricht level (3% GDP) -6-8 -10-12 -14 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 Eurostat 2008 2010 Eurostat 2007 2006 2005 2004 2003 Greece is a classical example of a country with excessive deficit. Additionally the quality of its deficit statistics was problematic. Year of data publication Source: Eurostat, European Commission. 13
Loss of competitiveness warning signal indicating future fiscal risks 135 REER (ULC defl. 1999=100) 130 125 120 115 110 105 100 95 90 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Germany Ireland Greece Spain Italy Portugal Unsustainable growth pattern and inflated GDP signalled future budget risks not captured by standard budget surveillance indicators. High revenue growth due to inflated growth was generally channelled into high expenditure spending. Warning signals were ignored as the financial turmoil started in 2007 and there were no significant budget measures after the outbreak of financial crisis in 4Q2008 to adjust to the falling level of revenues. Source: Eurostat. 14
1. Governments 2. Supervisory institutions: European Commission 3. Financial markets, rating agencies 15
Financial markets reacted too late 10Y bond yield (%) 1 12,0 1 8,0 6,0 2,0 Budget deficit (% GDP) 02-07 09-07 04-08 11-08 06-09 01-10 08-10 Greece Portugal Ireland Germany - -8,0-12,0 Source: Bloomberg, Eurostat. -16,0 2007 2008 Greece Portugal Ireland Germany 16
Rating agencies missed fiscal risks as well Budget defict vs. souvereign debt rating* Greece Portugal Spain - - - -8,0-8,0-8,0-12,0-12,0-12,0-16,0 2001 2002 2003 2004 2005 2006 2007 2008 Budget deficit (% GDP) -16,0 2001 2002 2003 2004 2005 2006 2007 2008 Budget deficit (% GDP) -16,0 2001 2002 2003 2004 2005 2006 2007 2008 Budget deficit (% GDP) - Jan : downgrade to A- (from A), - Dec : downgrade to BBB+, - Apr 2010: downgrade to BB+. - Jan : downgrade to A+ (from AA-), - Apr 2010: downgrade to A-. - Jan : downgrade to AA+ (from AAA), - Apr 2010: downgrade to AA. * Long-term local currency debt rating according to S&P. Source: Eurostat, S&P. 17
International capital ties increase contagion risk International obligations at end- (USD bn) Greece 75 Greece owes to Germany 45 USD bn 15 Germany 47 45 24 Portugal 238 France UK 114 Spain 190 220 511 Italy 77 188 186 Italy owes to France ca. 20% of France s GDP 60 Ireland Source: Based on NYTimes, BIS. 18
Conclusions Unsustainable and inflated growth and excessively loose fiscal policy led to sudden deterioration of fiscal position as an aftermath of financial turmoil Failure of Stability and Growth Pact was one of the causes of fiscal turmoil Financial market turned out to be short-sighted, ignoring long term risks 19