1. 貴
社
ま Freudenstadt Konferenz 2-4 July 2010
す
ま
す
ご
盛
栄
の
こ The Banking €risis and the Euro
と
と
お
慶
び
申
し
上
げ
ま
す
。
平
素
は
DAS BOOT
格
別
の
ご
高 euro
配
を
賜
り
、
厚
€ Krise: Banking, Trade & Growth?
く
御 τὸ Α καὶ τὸ Ω
礼
申
し Robert McDowell
上
げ Banking Expert & Macroeconomist (Edinburgh)
ま
す
。
2. 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
3. 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
4. Wolf pack v. euroConvoy
Atlantic 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
5. 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
7. 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
8. 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
9. 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?
_________________________________________________________
2
* Central banks, government finance ministries, regulators, major banks, NGO banks
10. EURO SYSTEM-KRISE
Maastricht SGP too crude
Multi-national sovereign
EURO 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 3
- hits banks again & other sectors but now per sovereign borders.
11. ENGINE ROOM
BLIND OR BLINKERED??
BLINKERED?
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!
4
12. WHO SETS
COURSE HEADINGS?
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!
5
13. UK & De bank lending
„crowding out’ in bank lending?
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)
4
14. Bank credit support
or not
for
INDUSTRY & TRADE?
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% /GDP
De 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% ratio
De banks extend $620bn credit supporting $1.5tn exports = 41% ratio
5
15. Debt burden
on De industry
& banks
LOGIC BEHIND MERKEL‟S
TOUGH-LOVE STANCE IN
EA SOVEREIGN DEBT
DISPUTE?
High exposure by De banks to industry (business loans are lowest margins) =
De sovereign debt spreads v. critical to banks‟ net interest income = in EA sovereign debt crisis
De priority = De sovereign debt needs far lower risk margin than other EU sovereigns!
Or, banks & corporates risk insolvency losses.
6
16. Die Heimat gefährdet ?
De BANKS VULNERABLE TO CREDIT
Sovereign debt prices directly influence banks‟ &
DEFAULTS AS TRADE & MARGINS FALL &
corporates‟ credit status & debt costs, not just
BANKS TO REFINANCE €0.5tn IF CANNOT
government borrowing cost! GET LOWEST RATES!?
De industry's debts= 160% /industry’s
gross output
Sovereign bonds
De industry debt servicing =10% / gross
spreads & yields operating surplus
for years 2007 – GDP forecasts are 1/3 lower than UK
2010 /German
Bund
UK industry debt servicing = 4% / gross
operating surplus,
Debt servicing for all UK business = 13%
/profit in ‟08 & 9% in ‟09
GDP forecasts are sharply higher than De
In „04-‟08 EL‟s GDP grew fastest
now endogenous CB‟s GDP higher
in medium term… except EA‟s PIIGS! 7
17. De in EU/EA
EU/EA
De trade & surplus = same size as China‟s
60% is intra-EU but De ex-EU trade surplus halves EU external deficit
De in EA
nf private sector lending = 22% of EA total
Lending 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 world
USA in the world is an extreme credit boom economy
De in Europe is an extreme export-led economy
____________________________________________________
nf = non-finance sector (business excluding banks etc.)
9
18. Greece
extreme credit boomer
Greek Banks' Loans by Sector as % ratios to GDP GREECE FOLLOWED
30 OTHERS „ MODELS -
IRELAND, UK, USA,
25 SPAIN & PRAISED IN EU
FOR HIGH GROWTH
20
CONTRIBUTION TO EU
FOR YEARS!
15
RECESSION WIPED OUT
10
90% OF GREEK BANK
CAPITAL. BUT THAT IS ON
5
A PAR WITH UK, USA,
OTHERS‟ BANK CAPITAL
0
IMPACTS.
2005
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2006
Tourism Services Industry Shipping
Consumer Other Personal Res.Housing Finance 10
19. Competitiveness: reality & illusion
300 275
EU Trade EU Balance
250
275 Balances of Payments
$ billions 225 $ billions
250
200
225 GERMANY
GERMANY
175 FRANCE
200 FRANCE
150 UK
UK
175
ITALY
ITALY 125
150 SPAIN
SPAIN
100 NETHERLANDS
NETHERLANDS
125
POLAND 75 POLAND
100 AUSTRIA AUSTRIA
50
DENMARK DENMARK
75
25 GREECE
GREECE
50 PORTUGAL
PORTUGAL 0
FINLAND FINLAND
25
-25
IRELAND IRELAND
0
CZECH -50 CZECH
-25 SLOVAKIA SLOVAKIA
-75
LUXEMBOURG LUXEMBOURG
-50 -100
-75 -125
-100 -150
11
2007 2008 2009 2007 2008 2009
20. Credit boom V. export led
GDP of 6 Credit Boom CB economies incl. USA and UK v. GDP of 10
$ billions Export Led EL economies incl. Japan, Germany &China.
20000
19000
credit-boom: USA, UK, Spain,
others 18000
export-led: China, Germany, Saudi
Arabia, Netherlands, Russia, S.Korea, 17000 CB
others EL
16000
modest mix: France, Italy, Belgium,
Switzerland, RSA, Mexico, others 15000
strong mix: India, Brazil, others
14000
2005 2006 2007 2008 2009
60,000
$ Bn US banks flow Note dependence of inter-
of funds by sector bank lending in USA to
50,000
household mortgage and
Households
40,000 consumer lending.
Non-financial business The opposite prevails in
30,000 export-led where inter-
All public sector bank lending is tied to
20,000 business lending.
Financial firms
10,000
Rest of the world
0
12
2000 2002 2003 2004 2005 2006 2007 2008
21. COMPARING BANK LENDING
USA & prCHINA
$ trillion rounded %
Dec.’09 % GDP $ trillion rounded Dec.’09 Increase
in ‘09
Bank & other lending 21.3 150
Financial 4.0 Bank Deposits 9 27.7
Enterprises 4.8 Of which: By enterprises 3.3 36.5
Loans & corp. bonds 3.2 By households 3.9 19.5
Commercial mortgages 1.6 Of which: Rmb
Deposits 3.8 19.7
Real estate 2.6
Households 14.0 102 By Government Foreign
Of which mortgages 1.8
10.8 currency
Consumer credit & lease finance 3.2 Bank Lending 6.3 33.0
Bank & Other Liabilities 21.3 150 Of which: Short-term 2.2 17.7
Non-financial Deposits 7.3 50 longer-term
3.5 43.5
Money Market depos 3.0
Trading 0.8
FC Reserve loaned to banks 2.4 600
Central bank Other 0.6
2.3
Other 2.6 Enterprises
Of which: 4.8
Banks reserve capital 1.1 Households 1.2
Equity 1.5
Other 0.3
Inter-bank debt 3.7
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?). 13
22. USA
65% of credit to households, Some more comparisons
22% to medium & large Enterprises
10% to small firms incl. self-employed.
70% of total exposure is property-related,
This chimes with UK, Spain, Greece, Ireland. UK banks lend too much to h‟holds for property
(70% /total customer loans)
Manufacturing (17%/GDP export 13%/GDP)
PR CHINA =3.5% business loans (1.5%/GDP)
75% loans to business Construction (5%/GDP) = 4.5% /business loans
19% to households (=2%/GDP)
nf firms debt =173% /total output Small firms & self employed get 1.5% of all loans
Net debt of enterprises =114% /output! yet employ 50% priv. sector jobs!
Households borrow 30% of h‟hold deposits.
German banks loan too much to industry at
UK & USA lending to h‟holds = 100%/GDP 56% / total customer lending
of which 70% = residential mortgages 29% /business loans are to small firms &
self-employed =10 x UK %.
China h‟hold loans =25%/GDP
mortgage & consumer finance are small.
14
23. Back to port
sovereign debt &
Euro system 1
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 15
24. Back to port
sovereign debt &
Euro system II
Maastricht Criteria /EU’s Growth & Stability Pact
- Ceilings & hurdles to cap member states‟ borrowing
in 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?) 15
25. Back to port
sovereign debt &
Euro system III
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.
15
27. A
• De was in heart of EU „generous’ to secure Europe.
EU,
• De is the protagonist in Euro Krise, bringing integration
into a crunching of gears.
• € incomplete : monetary union sans political union, ECB
sans central treasury (not insoluble).
• EA states are alone on sovereign debt weakened sans
treasury money market flexibility.
• ECB accepts sovereign debt of all EA equally, same interest
rate as Germany, but not a solution.
• Banks loaded up with PIIGS debt until 2010.
PIIGS‟
A
28. B
• After Sept. „08, EU Council guarantee no big banks will
default. De insists each state to care for its own.
• Capital moves with guarantees, interest-rate differences in
EA stay small.
• Hungary & Baltic states rescued.
• As markets cage-rattle sovereign debt, interest-rate
differentials widen.
• Greece the battleground.
• EU authorities slow. EA members hold opposing views.
• De insists on S&G Pact‟s “no bail-outs”.
• Greek crisis festers, contagion spreads.
B
29. C
• EU forced into bigger rescue package than if it‟d reacted
quicker.
• Markets see terms as punitive, fiscal consolidation harder, can‟t
see how PIIGS can fly:
• Close trade deficits & revive growth sans currency
depreciation? (Euro system break-up) or risk deflation.
• Can push EU into long stagnation (late „90s early „00s) = social
unrest (at worst, xenophobic extremism).
• De has major responsibility as biggest trade surplus, most
creditworthy country (externally, not internally)
C
30. D
• De unwittingly imposes deflation on EA (itself included &
next recession imminent).
• De 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; De will also fall.
D
31. E
• If De left €, Dm would soar, € & De exports plummet.
• Rest of Europe more competitive to grow its way out but
Germany crucified by overvalued currency (like Japan).
• De trade balance evaporates, businesses default &
unemployment soars (extreme political crisis).
• De Banks require v.large injections of gov. funds.
• Hypothetical - if De left €, consequences are immense,
unthinkable beyond making sure this cannot happen!
E
