Bank Assets, Budget Deficits, and Growth

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1 Bank Assets, Budget Deficits, and Growth Hung Q. Tran Garanti Masters Conference Istanbul October 21

2 Reality Check Conclusion of EU bank stress test (July 23, 21) 7 banks would see their Tier 1 capital ratios fall below 6%, with an overall shortfall of 3.5 billion of Tier 1 own funds (CEBS) Basel III Reality Irish Reality (September 3, 21) Allied Irish: 3 billion Irish Nationwide Building Society 2.7 billion Anglo Irish 6.4 billion (+ 5 billion more in adverse scenario) 2

3 Residential Property Prices of GIPS and U.K. index, Mar 26 = UK Portugal Spain Greece Ireland 4 ' '2 '4 '6 '8 '1 Source: BIS and IIF calculations 3

4 Selected German, French and GIPS Banks: NPL Ratios percent, weighted avg. of top 3 banks by asset size Latest 4 2 Ireland Greece France Spain Germany P o rtugal Source: Bankscope, latest available data 4

5 GIPS Countries, France & Germany Bank Valuation: Price to Book Ratio MSCI indices, price to book ratios Germany Greece Portugal France Ireland Spain '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 5

6 Reliance on ECB Funding Total ECB Funding and GIPS Share in ECB Funding EUR billions percentage Total ECB Funding GIPS share(rhs) Source: ECB, National Central Banks, and IIF calculations ECB Funding to Greece, Ireland, Portugal and Spain percent of total banking system assets 2 Greece 15 Ireland Portugal 1 Spain Source: National Central Banks, ECB, IIF calculations 6

7 Int'l Bank Claims on Selected European Countries USD billions, March 21 Spain 927 Ireland Portugal Greece British French German Swiss Other Euro pean Other Dutch US ,2 Source: BIS. * Consolidated foreign claims, ultimate risk basis. 7

8 Share of Criticized Credits percentage Real Estate All

9 M aturity Sch edu le for Comme rc ial R eal Es ta te L oan s Held by Banks US$ billions, by origination year Pre Source: Congr ess ional Overs ight Panel 9

10 U.S. Bank Liabilities: "Shadow" vs Traditional Banking USD trillions " Shadow" Bank Liabilities Traditional Bank Liabilities '5 '6 '7 '8 '9 ' '1 Source: Federal Reserve of New York, U.S. Flow of Funds 1

11 Euro Area: Central Government Cash Deficits EUR billion, January - August cumulative *Jan-Sep cumulative Spain Greece* Ireland Portugal 11

12 European Government Bond Spreads* spread over German bunds, bps 1, 9 8 Greece Ireland 7 Portugal Spain Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 * 1-year government bonds. 12

13 Selected Mature Market Government Fiscal Deficits General gov't financial balances, % GDP Greece US Spain Ireland UK Portugal France Italy Germany Source: IM F est./proj

14 Selected Mature Market Government Debt Levels General government debt, % GDP Greece Italy U.S. Portugal France Ireland U.K. Spain Germany Source: IM F est./proj

15 The Effect of Enacted Pension Reforms, pension expenditure, percent of GDP % of GDP, 23, excluding reforms 8.1% of GDP, 23, including reforms 4 2 Source: IM F 7.1% of GDP,

16 Projected Increase in Health Care Spending until 23 percent of GDP Canada Japan U.S. EU Source: IM F 16

17 Total State Budget Shortfalls USD Billions FY2 FY3 FY4 FY5 FY9 FY1 FY11 FY12 estimated reported 17

18 General Govt Net Debt Scenario under 21 Policies average percent of GDP for G7 countries Source: IM F 18

19 Rules of 1 percent After major financial crises, recovery averages 1% less. Countries with public debt/gdp>9% grow 1% less. 1% fiscal consolidation leads to.5% drop in GDP growth in subsequent two years. Impact doubles if policy rates are already very low and many countries are tightening at the same time. If growth in MMCs between is 1% lower than consensus, debt/gdp would be 1-15% higher. 19

20 European Sov., Corp. and Financial CDS spreads bps, ITraxx WE SovX, HG corp. & senior fin. CDS spreads Sovereign Corporate Financial 4 Oct-9 Feb -1 Jun-1 Oct-1 2

21 Selected Euro Area, China and U.S. Sov. CDS Spreads 5-year CDS spreads, bps 6 5 Germany U.S. Ireland Portugal 4 Spain China Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 21

22 EMBIG and Selected Euro Area Bond* Spreads basispoints 1, EMBIG spread GIPS Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 *Greek, Irish, Portuguese, Spanish 1-year bonds over German 1 years bunds, GDP weighted average 22

23 Emerging Market Private Capital Inflows, Net $ billion percent of GDP Level Percent of GDP (rhs) Source: IIF Capital Flows 23

24 Equity Market Performance MSCI indices (US$ returns), end-26=1 16 Mature markets 13 Emerging markets Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 24

25 Selected Emerging Market Currencies index, 12/31/28=1, increase=usd depreciation Brazilian real South Korean Won Chinese Renminbi Turkish Lira M alaysian Ringgit Chilean Peso 8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 25

26 Conclusions Currently uncoordinated and largely inconsistent policy moves risk degenerating to trade wars. Leadership needed for multilateral policy coordination. Be aware of net cumulative impact of financial regulatory reforms on already feeble growth. 26

27 Bank Assets, Budget Deficits, and Growth Hung Q. Tran Garanti Masters Conference Istanbul October 21

PRESENTATION BY JACOB A. FRENKEL AT THE FORUM: INTELLIGENCE ON THE WORLD, EUROPE, AND ITALY. Villa d'este, Cernobbio - September 7, 8 and 9, 2012

PRESENTATION BY JACOB A. FRENKEL AT THE FORUM: INTELLIGENCE ON THE WORLD, EUROPE, AND ITALY Villa d'este, Cernobbio - September 7, 8 and 9, 1 Working paper, September 1. Kindly authorized by the Author.