ECB LTRO Dec Greece program

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1 International Monetary Fund June 9, 212 Euro Area Crisis: Still in the Danger Zone */ Emil Stavrev Research Department ( */ Views expressed in this presentation are those of the author and do not necessarily represent those of the IMF or IMF Policy)

2 Overview Recent Developments: Still in the Danger Zone Financial Stress, Bank Deleveraging, and Spillovers Intra-Euro Area Imbalances Policies to Resolve the Crisis and Build a Stronger EMU 1

3 Financial Stress in the Euro Area Key European Spreads (basis points) European Financial CDS (LHS) High Yield Euro-Area Sov. Bond Spreads (RHS) 5 Lehman Greece program Ireland Program ECB LTRO Dec /4 Source: IMF, Global Financial Stability Report. 2

4 Bond Yields in the Periphery Remain Elevated Size of Euro Area Government Bond Markets (percent of total euro-area government debt) Average sovereign CDS spreads: Over 4 basis points 2-4 basis points 15-2 basis points Under 15 basis points Finland 1% Netherlands 5% Greece 5% Ireland 1% Portugal 2% Greece Ireland Netherlands 4% 1% 5% Portugal 2% Finland 1% Finland 1% Netherlands 5% Greece 4% Ireland 1% Portugal 2% Germany 22% Italy 26% Germany 23% Italy 25% Germany 23% Italy 25% France 21% Spain Austria 9% 3% Austria 3% Belgium 5% France 21% Spain 1% Belgium 5% Austria 3% France 21% Spain 1% Belgium 5% April 21 November 211 February 212 Sources: Bank for International Settlements; Bloomberg L.P.; and IMF staff estimates. 3

5 European Bank Deleveraging Has Continued 4 35 Bank Leverage 1/ (adjusted tangible assets to Tier 1 common capital) Euro area UK U.K. US U.S. Evolution of Adjusted Foreign Claims during 211Q4 2/ (by borrower region) All Countries Europe Western Hemisphere Asia & Pacific Q4 1 Mar 6 Mar 7 Mar 8 Mar 9 Mar 1 Mar 11 Mar Percentage change As percent of borrowers' GDP As percent of available credit Sources: SNL Financial; Bank for International Settlements; and IMF staff estimates. 1/ Tangible assets are adjusted on best-endeavor basis to adjust for accounting differences. 2/ Data adjusted for exchange rate variations and breaks. 4

6 Lending Standards Tightening while Credit Decelerates 7 Contributions to Euro Area Lending Conditions for Companies 1/ (net percentage; balance of respondents) Balance sheet constraints 6 Cyclical factors 3 Credit Growth to the Non-Financial Private Sector (percent; year-on-year) France Germany Italy 25 Spain Euro-Area 5 4 Competition Overall Q Apr Sources: European Central Bank; Haver Analytics; and IMF staff calculations. 1/ Chart based on factors cited by lending conditions survey respondents. Balance sheet constraints include capital, access to financing, liquidity position and collateral needs. Cyclical factors include general economic activity and industry outlook. 5

7 Adverse Feedback Loops in Europe More Consolidation or stabilizers held back Lower growth Worsen fiscal balance Lower bank asset quality Public Support Needs Deleveraging & Less bank lending Fiscal Financial Sovereign risks increase 6

8 Potential Global Spillovers from Euro Crisis Scenario 7

9 Intra-Euro Area Imbalances: Sovereign Risk Spreads Compressed Sharply after EMU Inception 2 Government Bond Spreads (1-year yield spreads over German bunds; basis points) France Italy Ireland 15 Portugal 125 Spain 1 Greece (RHS) / Source: Bloomberg L.P. 8

10 Imbalances Have Compressed Somewhat But Further Rebalancing is Still Needed 4. Current Account Balances 1/ (percent of world GDP) EA surplus excl. Ger GIIPS Euro area Germany EA deficit excl. GIIPS 115 Euro area: Growth and Recovery from the Crisis 1/ (27=1; real GDP index) EA Surplus EA Deficit Source: IMF, World Economic Outlook. Source: IMF staff estimates. 1/ Euro area external surplus countries: Austria, Belgium, Finland, Germany, Luxembourg, Netherlands. Euro area external deficit countries: Greece, Ireland, Italy, Portugal, Spain. 9

11 Target 2 Imbalances Widened Following the Crisis Claims of euro area NCBs against the ECB (billions of euros) Claims of euro area NCBs against the ECB (percent of GDP) 6 Germany Greece 5 Italy Portugal 4 Spain Germany Italy Spain Greece Portugal Dec Dec Source: National central banks. 1

12 Efforts on Several Fronts are Needed to Build a Stronger EMU Resolute crisis management and containment Moving toward a common financial stability framework Stronger fiscal integration, complemented with ex-ante risk sharing Institutional monitoring and constraints on excessive imbalances Growth and Employment 11