Credit Crunch In Europe Bepa

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Is there a Credit Crunch In Europe? Data about the availability of loans and looking at credit turbulence and imbalance in Europe by BEPA

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Credit Crunch In Europe Bepa

  1. 1. Is There a Credit Crunch in Europe? Vitor Gaspar, Director General of BEPA (Bureau of European Policy Advisers) Symposium “ The Credit Crunch and Its Implications for Europe” Tilburg, 5th September 2008 The views expressed are my own and do not necessarily reflect those of the European Commission.
  2. 2. Definition of credit crunch Credit crunch is characterized by a sudden reduction in the availability, or a sudden increase in the cost, of obtaining loans from banks. Bernanke and Lown (1991) define a credit crunch as a decline in the supply of credit that is abnormally large for a given stage of a business cycle.
  3. 3. No sudden reduction in the general availability of loans Figure 1: M2, credit to non-financial corporations and credit to households and individual enterprises in the Euro area, January 2000-June 2008 in billion EUR annualized growth rates (%) M2 M2 M2 M2 Credit to non-financial corporations Credit to non-financial corporations Credit to non-financial corporations Credit to non-financial corporations Credit to households and individual enterprises Credit to households and individual enterprises Credit to households and individual enterprises Credit to households and individual enterprises 8000 16 8000 16 14 7000 14 7000 12 12 6000 growth rate (%) in billion EUR 6000 growth rate (%) 10 in billion EUR 10 5000 8 5000 8 6 4000 6 4000 4 4 3000 3000 2 2 2000 0 2000 0 janv-00 janv-01 janv-02 janv-03 janv-04 janv-05 janv-06 janv-07 janv-08 janv-00 janv-01 janv-02 janv-03 janv-04 janv-05 janv-06 janv-07 janv-08 janv-00 janv-01 janv-02 janv-03 janv-04 janv-05 janv-06 janv-07 janv-08 janv-00 janv-01 janv-02 janv-03 janv-04 janv-05 janv-06 janv-07 janv-08 Source: ECB.
  4. 4. Bank deposits are increasing fast Figure 2: Banks’ deposits as a share of M2, and annualized growth rate of banks’ deposits the Euro area, January 2000-June 2008 Banks' deposits as aa share of M2 (lhs) Banks' deposits as share of M2 (lhs) Banks' deposits growth rate (rhs) Banks' deposits growth rate (rhs) Banks' deposits growth rate (YoY Banks' deposits growth rate (YoY 54 54 Banks' deposits/M2 (%) Banks' deposits/M2 (%) 52 19 19 52 50 50 14 14 48 %) 48 99 %) 46 46 44 44 44 42 42 -1 -1 janv- oct- juil- avr- janv- oct- juil- avr- janv- oct- juil- avr- janv- oct- juil- avr- janv- oct- juil- avr- janv- oct- juil- avr- 00 00 01 02 03 03 04 05 06 06 07 08 00 00 01 02 03 03 04 05 06 06 07 08 Source: ECB.
  5. 5. No sudden increase in the cost of obtaining loans Figure 3: Selected interest rates for the Euro area, YoY in %, January 2000-July 2008 Non-financial corporations loans, total maturity Non-financial corporations loans, total maturity Household loans for house purchasing, total maturity Household loans for house purchasing, total maturity 66 interest rate (%) 5,5 interest rate (%) 5,5 55 4,5 4,5 44 janv-03 janv-03 janv-04 janv-04 janv-05 janv-05 janv-06 janv-06 janv-07 janv-07 janv-08 janv-08 Source: ECB.
  6. 6. Is There a Credit Crunch in Euro Area? No!
  7. 7. Outline 1. The roots of the turmoil: accumulation of imbalances 2. The trigger and propagation 3. Macroeconomic situation and outlook in the Euro area 4. Conclusion
  8. 8. Outline 1. The roots of the turmoil: accumulation of imbalances 2. The trigger and propagation 3. Macroeconomic situation and outlook in the Euro area 4. Conclusion
  9. 9. The roots of the turmoil: accumulation of imbalances The current turmoil should be seen as part of the adjustment to major imbalances that accumulated in the past years: (1) strong growth in money and credit globally (excess liquidity); (2) large current account deficits in the US (and surpluses in Asia and in oil exporting countries); (3) compressed financial spreads; (4) housing market bubbles in some countries.
  10. 10. The roots of the turmoil: accumulation of imbalances Loose monetary policy in most countries, but particularly in the USA, led to excess liquidity in international financial markets Global excess liquidity has driven long-term world interest rates to historically low levels, caused asset price inflation and a high demand for the US assets, which resulted in a growing US current account deficit; As US external imbalance has been mainly financed through foreign official lending, it led to the build up of reserves and current account surpluses in Asian countries, particularly in China.
  11. 11. The roots of the turmoil: accumulation of imbalances Financial spreads have been abnormally low and had to widen as a part of adjustment process to the equilibrium. Figure 1: Differential between the 3-month interbank rate and the 3-month indexed swap rate (daily data, 2 January 2006- 22 August 2008) Euro Sterling USD Euro Sterling USD 1,1 1,1 0,9 0,9 0,7 0,7 0,5 0,5 0,3 0,3 0,1 0,1 -0,1 -0,1 2/01/06 2/01/06 2/07/06 2/07/06 2/01/07 2/01/07 2/07/07 2/07/07 2/01/08 2/01/08 2/07/08 2/07/08 Source: Bloomberg.
  12. 12. The roots of the turmoil: accumulation of imbalances Financial turmoil was triggered by disturbance in the US sub-prime mortgage market, which, in turn was part of a housing market correction process. Figure 2: US monthly housing price index, January 2000-May 2008 230 26 2 230 26 2 Jan 2006- 210 24 2 Housing price index Housing price index 210 24 2 May 2008 Housing price index Housing price index 190 22 2 190 22 2 170 170 20 2 20 2 150 150 28 1 28 1 130 130 janv oct- juil- av - r- janv oct- juil- av - r- janv oct- juil- av - r- 1 26 janv oct- juil- av - r- janv oct- juil- av - r- janv oct- juil- av - r- 1 26 00 00 01 02 03 03 04 05 06 06 07 08 ja v 6 n-0 il-0 ju 6 ja v 7 n-0 ju 7 il-0 n-0 ja v 8 00 00 01 02 03 03 04 05 06 06 07 08 ja v 6 n-0 il-0 ju 6 ja v 7 n-0 ju 7 il-0 n-0 ja v 8 Source: Office of Federal Housing Enterprise Oversight.
  13. 13. The roots of the turmoil: accumulation of imbalances Figure 3: Annualized growth rate of new house prices in the USA, January 2000-June 2008 20 20 15 15 growth rate YoY (%) growth rate YoY (%) 10 10 55 00 -5 -5 -10 -10 -15 -15 janv- oct- juil- avr- janv- oct- juil- avr- janv- oct- juil- avr- janv- oct- juil- avr- janv- oct- juil- avr- janv- oct- juil- avr- 00 00 00 00 0101 0202 03 03 03 03 0404 0505 06 06 06 06 0707 0808 Source: Office of Federal Housing Enterprise Oversight.
  14. 14. The roots of the turmoil: accumulation of imbalances The boom-bust pattern in the housing market has occurred also in Europe (Spain, Ireland) albeit without the sub-prime mortgage twist. Figure 4: Annualized growth rates of housing prices in Spain and Ireland, January 2000-June 2008 Spain (lhs) Spain (lhs) Ireland (rhs) Ireland (rhs) 20 20 25 25 20 20 17 growth rate YoY(%) growth rate YoY(%) 17 growth rate YoY(%) growth rate YoY(%) 15 15 14 14 10 10 11 11 55 00 88 -5 -5 55 -10 -10 22 -15 -15 ma déc- sept- juin- ma déc- sept- juin- ma déc- sept- juin- ma déc- sept- juin- ma déc- sept- juin- ma déc- sept- juin- rs-00 00 rs-00 00 01 01 02 rs-03 03 02 rs-03 03 0404 05 rs-06 06 05 rs-06 06 0707 08 08 Source: Central Statistical Bank of Ireland, Bloomberg.
  15. 15. The roots of the turmoil: accumulation of imbalances Adjustment of housing prices and construction sector had direct effects on economic activity. Figure 5: Euro area total and construction Figure 6: Monthly HPIC inflation and real employment rates, Q1 2000-Q1 2008, YoY wages measured as unit labor cost, YoY change (%) change (%) January 2000-July 2008 Employment in construction sector (rhs) Total employment (lhs) HIPC inflation Unit labor cost Employment in construction sector (rhs) Total employment (lhs) HIPC inflation Unit labor cost 66 66 Unit labor cost growth (YoY %) 4,5 Unit labor cost growth (YoY %) 4,5 HIPC inflation (YoY %) 55 growth rate YoY (%) growth rate YoY (%) HIPC inflation (YoY %) 4 growth rate YoY (%) growth rate YoY (%) 44 4 44 3,5 3,5 33 22 3 3 22 2,5 2,5 00 2 11 2 1,5 00 -2 1,5 -2 janv- oct- juil- avr- janv- oct- juil- avr- janv- oct- juil- avr- Q1- Q4- Q3- Q2- Q1- Q4- Q3- Q2- Q1- Q4- Q3- janv- oct- juil- avr- janv- oct- juil- avr- janv- oct- juil- avr- Q1- Q4- Q3- Q2- Q1- Q4- Q3- Q2- Q1- Q4- Q3- 00 00 01 02 03 03 04 05 06 06 07 08 00 00 01 02 03 03 04 05 06 06 07 08 2000 2000 2001 2002 2003 2003 2004 2005 2006 2006 2007 2000 2000 2001 2002 2003 2003 2004 2005 2006 2006 2007 Source: Eurostat.
  16. 16. The roots of the turmoil: accumulation of imbalances Figure 7: Euro area real GDP growth, annual and quarterly changes, Q1 2000-Q2 2008, (%) Real GPD growth rate (QoQ %) lhs Real GPD growth rate (QoQ %) lhs Real GPD growth rate (YoY %) rhs Real GPD growth rate (YoY %) rhs 1,2 1,2 66 55 growth rate QoQ (%) growth rate YoY (%) growth rate QoQ (%) growth rate YoY (%) 0,8 0,8 44 0,4 0,4 33 22 00 11 -0,4 -0,4 00 Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Eurostat.
  17. 17. Outline 1. The roots of the turmoil: accumulation of imbalances 2. The trigger and propagation 3. Macroeconomic situation and outlook in the Euro area 4. Conclusion
  18. 18. The trigger and propagation The correction in housing markets affects business cycle developments directly: Wealth effects depress private consumption; Lower housing prices depress construction. Increased risks, aggravated by opacity, led to a heightened awareness of the importance of counterparty risk (Taylor and Williams, 2008). Heightened perception of risk and losses on banks asset portfolios banks will have to undergo a deleveraging process. (Greenlaw, Hatzius, Kashyap, Song Shin, 2008)
  19. 19. Outline 1. The roots of the turmoil: accumulation of imbalances 2. The trigger and propagation 3. Macroeconomic situation and outlook in the Euro area 4. Conclusion
  20. 20. Macroeconomic situation and outlook in the Euro area The outcome of the first quarter proved stronger than expected, partly on the back of temporary factors, such as unusually warm winter weather boosting construction investment, especially in Germany ; While real GDP growth in the Euro area has been strong in the first quarter (0.7% increase QoQ), it decreased by 0.2% (QoQ) in the second quarter of 2008 (flash ESTAT estimate); On an annual basis GDP growth thereby declined to 1.5% in the euro area (down from 2.1% in the first quarter).
  21. 21. Baseline scenario According to the baseline scenario the euro area economy will continue to grow, in the second half of 2008 and in 2009 (albeit at below potential output growth rates). Economic forecasts are likely to be revised down. Inflation pressures should gradually ease. However, the degree of uncertainty we face is particularly elevated.
  22. 22. Baseline scenario In short: Smooth slowdown of economic activity And gradually: inflation pressures ease financial turbulence looses strength But, however macroeconomic risks are unusually high…
  23. 23. Risk Scenario 1: Financial economic activity vicious circle Tightening credit conditions Lower economic growth Increased pressure on financial sector balance sheets Rising interest rates and negative wealth effects Reduction in the number of creditworthy borrowers
  24. 24. Risk Scenario 2: Inflation-financial intermediation vicious circle Two-year inflation expectations are significantly above 2% Inflation is the main concern of EU citizens Experience of 70s and 80s shows how costly it is to let inflation expectations unhinged Generate a discrete drop in the performance of the financial system …which impact on economic development and growth
  25. 25. Outline 1. The roots of the turmoil: accumulation of imbalances 2. The trigger and propagation 3. Macroeconomic situation and outlook in the Euro area 3.1 Baseline scenario 4. Conclusion
  26. 26. 4. Conclusion Adjustment to past imbalances and excesses cannot be avoided. The baseline remains benign. The current macroeconomic situation is characterized by an unusually elevated degree of uncertainty. The factors referred in the presentation permit the construction of a variety of risk scenarios. Other factors (not mentioned) may affect developments in unforeseen ways.
  27. 27. Is There a Credit Crunch in Europe? Vitor Gaspar, Director General of BEPA (Bureau of European Policy Advisers) Symposium “ The Credit Crunch and Its Implications for Europe” Tilburg, 5th September 2008 The views expressed are my own and do not necessarily reflect those of the European Commission.

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