Panel Discussion: Europe at the Crossroads Markus Brunnermeier Paul Krugman Hyun Song Shin Christopher Sims October 24th, 2011 Department of Economics and Griswold Center for Economic Policy Studies 1
Schedule October 23rd, Summit of EU leaders October 26th, Summit of EU leaders November 3-4th, France to host G20 Summit in Cannes 2
Issues on the Table (as based on press leaks/plants) How large a haircut (write-down) for Greek debt? Size and manner of bank recapitalization Enhancement of European Financial Stability Facility (EFSF) EFSF as a bank that borrows from ECB EFSF as bond insurer for first % of losses EFSF as co-investor in a securitization vehicle (with China? Brazil?...) 3
Why Does It Matter? Consequences for United States Consequences for emerging/developing economies 4
Trillion Dollars 12.0 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0-8.0-10.0 U.S. dollar assets of banks outside US Euro assets of banks outside eurozone Sterling assets of banks outside UK Yen assets of banks outside Japan Yen liabilities of banks outside Japan Sterling liabilities of banks outside UK Euro liabilities of banks outside eurozone -12.0 Mar.1999 Dec.1999 Sep.2000 Jun.2001 Mar.2002 Dec.2002 Sep.2003 Jun.2004 Mar.2005 Dec.2005 Sep.2006 Jun.2007 Mar.2008 Dec.2008 Sep.2009 Jun.2010 U.S. dollar liabilities of banks outside US 5 Figure 1: Cross-border foreign currency claims of BIS reporting banks by currency (Source: BIS locational banking statistics, Table 5A)
Trillion Dollars 11.0 10.0 9.0 8.0 2008Q1 US chartered commercial banks' total financial assets 7.0 6.0 5.0 US dollar assets of banks outside US 4.0 3.0 2.0 2010Q2 2009Q1 2007Q4 2006Q3 2005Q2 2004Q1 2002Q4 2001Q3 2000Q2 1999Q1 Figure 2: US dollar cross-border foreign currency claims and US commercial bank total assets (Source: Flow of Funds, Federal Reserve and BIS6 locational banking statistics, Table 5A)
Figure 3: US Dollar-denominated assets and liabilities of euro area banks7 (Source: ECB Financial Stability Review, June 2011, p. 102)
European Global Banks US Borrowers Shadow banking system US Banking Sector Wholesale funding market US Households border Figure 4: European global banks add intermediation capacity for connecting US savers and borrowers 8
Trillion Dollars 6.0 5.0 4.0 3.0 Other European BIS reporting countries Switzerland 2.0 United Kingdom 1.0 France Germany 0.0 2010-Q4 2010-Q2 2009-Q4 2009-Q2 2008-Q4 2008-Q2 2007-Q4 2007-Q2 2006-Q4 2006-Q2 2005-Q4 2005-Q2 Figure 5: International claims of European BIS reporting banks on US counterparties (Source: BIS consolidated banking statistics, Table 9D) 9
Amount Owed by European Banks to US Prime Money Market Funds end-june, 2011 (by nationality of borrowing bank) 250 200 150 100 Billion Dollars 50 0 Luxembourg Belgium Austria Spain Italy Denmark Norway Sweden Switzerland Germay Netherlands United Kingdom France Figure 6: Amount owed by European banks to US prime money market funds by nationality of borrowing bank (end-june 2011) (Source: IMF 10 GFSR September 2011)
Figure 7: US prime money market fund claims on banks (Source: IMF GFSR September 2011) 11
2.5 2.0 Trillion Euros 1.5 12 Equity Other Liabilities 1.0 Total Customer Deposits 0.5 0.0 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Figure 8: BNP Paribas total liabilities (Source: Bankscope)
Trillion Euros 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 Equity Other Liabilities Total Customer Deposits 0.2 0.0 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Figure 9: Credit Agricole liabilities 1999-2010 (Source: Bankscope) 13
Trillion Euros 1.2 1.0 0.8 0.6 Equity Other Liabilities 0.4 0.2 Total Customer Deposits 0.0 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Figure 10: Société Générale liabilities 1999-2010 (Source: Bankscope) 14
12.0 10.0 Trillion Dollars Cross-Border domestic currency assets of Eurozone banks 8.0 6.0 Cross-Border domestic currency liabilities of Eurozone banks 4.0 2.0 0.0 Mar.2011 Jun.2009 Sep.2007 Dec.2005 Mar.2004 Jun.2002 Sep.2000 Dec.1998 Mar.1997 Jun.1995 Sep.1993 Dec.1991 Mar.1990 Jun.1988 Sep.1986 Dec.1984 Mar.1983 Jun.1981 Sep.1979 Dec.1977 Figure 11: Cross-border domestic currency assets and liabilities of eurozone banks (Source: BIS locational banking statistics, Table 5A) 15
12.0 10.0 Trillion Dollars Cross-Border domestic currency assets of Eurozone banks 8.0 6.0 Cross-Border domestic currency liabilities of Eurozone banks 4.0 2.0 0.0 Mar.2011 Jun.2010 Sep.2009 Dec.2008 Mar.2008 Jun.2007 Sep.2006 Dec.2005 Mar.2005 Jun.2004 Sep.2003 Dec.2002 Mar.2002 Jun.2001 Sep.2000 Dec.1999 Mar.1999 Figure 12: Cross-border domestic currency assets and liabilities of eurozone banks (Source: BIS locational banking statistics, Table 5A) 16
Claims of European Banks on Counterparties in Spain Trillion Dollars 1.2 1.0 0.8 0.6 0.4 0.2 Other European BIS reporting countries Switzerland United Kingdom France 0.0 2005-Q2 2005-Q4 2006-Q2 2006-Q4 2007-Q2 2007-Q4 2008-Q2 2008-Q4 2009-Q2 2009-Q4 2010-Q2 2010-Q4 Germany Figure 13: International claims of European BIS-reporting banks on counterparties in Spain (Source: BIS consolidated banking statistics, 17 Table 9D)
Claims of European banks on Counterparties in Ireland Trillion Dollars 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 Other European BIS reporting countries Switzerland United Kingdom France 0.1 0.0 2005-Q2 2005-Q4 2006-Q2 2006-Q4 2007-Q2 2007-Q4 2008-Q2 2008-Q4 2009-Q2 2009-Q4 2010-Q2 2010-Q4 Germany Figure 14: International claims of European BIS-reporting banks on counterparties in Ireland (Source: BIS consolidated banking statistics, 18 Table 9D)
Current Account Balance as % of GDP 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 3.0 Ireland Spain 1.0-1.0-3.0-5.0-7.0-9.0 Current Account Balance as % of GDP -10% -11.0 Figure 15: Current account of Ireland and Spain (Source: IMF International Financial Statistics) 19
Trading Book 12% Hold to Maturity 39% Available for Sale 49% Trading Book Available for Sale Hold to Maturity Figure 16: Accounting classifications of European Banks holding of European sovereign debt (Source: IMF GFSR September 2011) 20
Figure 17: European banks holding of high spread sovereign debt by accounting classification (Source: FT Alphaville citing Deutsche Bank report) 21
Figure 18: CDS implied impairment of European Bank assets (Source: IMF GFSR September 2011) 22
Implications for Current Conjuncture in Europe Europe has a twin crisis, combining banking crisis with sovereign debt crisis Emerging economy crises of 1990s were twin crises, combining banking crisis with currency crisis Deleveraging by European banks will impact not only eurozone, but also US shadow banking system Capital flowstoemergingeconomies 23
Issues on the Table (as based on press leaks/plants) How large a haircut (write-down) for Greek debt holders? Size and manner of bank recapitalization Enhancement of European Financial Stability Facility (EFSF) EFSF as a bank that borrows from ECB EFSF as bond insurer for first % of losses EFSF as co-investor in a securitization vehicle (with China? Brazil?...) 24