The document summarizes responses to the euro area crisis from monetary, fiscal and structural policy perspectives. It discusses short-term measures taken as well as long-term solutions needed, including fully-fledged fiscal and economic institutions and structural reforms. The crisis originated from excessive indebtedness and imbalances in both public and private sectors. Monetary policy played an essential role in fighting the crisis through liquidity provision and unconventional measures. Fiscal initiatives aim to impose budget controls and enable cross-country financial solidarity.
The Eurozone Takes A Final Step Toward a Banking UnionQNB Group
The Eurozone took steps to create a banking union by delegating bank supervision responsibilities to the European Central Bank starting in 2015 and establishing a unified bank resolution system. This aims to reduce the risk of another financial crisis and break the link between banking crises and rising sovereign debt levels. A Eurozone-wide regulatory environment and centralized bank oversight will help level the playing field for banks and prevent national political interference. The agreement also establishes a 55 billion euro bank resolution fund over 8 years to help intervene in struggling banks. Overall, the banking union is an important step towards strengthening the credibility and stability of the Euro currency.
Country Responses to the Financial Crisis Kosovoicgfmconference
“Country Responses to the Financial Crisis”
Behxhet Brajshori, Deputy Minister, Ministry of the Economy and Finance, Republic of Kosovo
Lulzim Ismajli, Director of Treasury, Ministry of the Economy and Finance, Republic of Kosovo
Naomi Ngwira, Director, Department of Debt and Aid, Ministry of Finance, Malawi
Obadiah Mailafia, Chariman, Center for Policy and Economic Research, Nigeria
During this panel, participants will share observations of the effects of the crisis on their economies and future plans. They will also share existing tools to safeguard their investments.
The session will include a discussion on how they are mitigating the impacts and how they
expect to cover the cost. Panelists and the audience will be asked to address the following
questions.
Registration
Immediate Actions Being Taken to Manage the Impact
Is the situation different for middle vs. lower income countries?
How does the current financial crisis affect a country’s ability to borrow?
Is the situation different for resource rich countries?
Can we learn anything from previous financial crises (e.g. Asia and Latin America)?
How are recipient countries more efficiently managing their donor aid?
What is the role of the government in solving financial sector issues?
This document summarizes a breakfast teach-in on the Eurozone sovereign debt crisis and its potential impacts on UK pension funds. It provides background on the crisis and analyzes two sample pension fund allocations (A and B) under three potential Eurozone scenarios: a Greek default, breakup of the Eurozone periphery, and a full breakup of the Euro currency. Allocation B is found to better manage risks through a reduced equity allocation and increased allocation to less volatile assets.
Ivo Pezzuto - "GREXIT": AVOIDED FOR NOW! (The Global Analyst Magazine August...Dr. Ivo Pezzuto
The threat of an unceremonious exit from the Euro Zone might have receded for the beleaguered Greece, at least for now. However, there is no guarantee the present bailout deal is enough to ensure the European economy’s return to normalcy. Given, the billion euro question is: Has it done enough to avoid exiting the Euro Zone? Whatever, one thing is for sure, the collapse of Greek economy could also mean collateral zone for one of the oldest and strongest trade block – Eurozone.
Draghinomics Introduces Quantitative Easing to the Eurozone QNB Group
The European Central Bank announced its first quantitative easing program to stimulate the stagnant eurozone economy. It will purchase private sector assets starting in October 2014 to expand its balance sheet by €1 trillion, following other central banks. This is expected to depreciate the euro relative to the dollar due to the larger growth in the ECB's balance sheet compared to the slowing Federal Reserve program. The quantitative easing may help the eurozone avoid deflation and recover economic activity.
Presentation by Andris Vilks, Minister of Finance, Republic of Latvia at the Bank of Latvia conference "Economic Adjustment under Sovereign Debt Crisis: Can Experience of the Baltics Be Applied to Others?"
Riga, November 2, 2012.
The Eurozone Takes A Final Step Toward a Banking UnionQNB Group
The Eurozone took steps to create a banking union by delegating bank supervision responsibilities to the European Central Bank starting in 2015 and establishing a unified bank resolution system. This aims to reduce the risk of another financial crisis and break the link between banking crises and rising sovereign debt levels. A Eurozone-wide regulatory environment and centralized bank oversight will help level the playing field for banks and prevent national political interference. The agreement also establishes a 55 billion euro bank resolution fund over 8 years to help intervene in struggling banks. Overall, the banking union is an important step towards strengthening the credibility and stability of the Euro currency.
Country Responses to the Financial Crisis Kosovoicgfmconference
“Country Responses to the Financial Crisis”
Behxhet Brajshori, Deputy Minister, Ministry of the Economy and Finance, Republic of Kosovo
Lulzim Ismajli, Director of Treasury, Ministry of the Economy and Finance, Republic of Kosovo
Naomi Ngwira, Director, Department of Debt and Aid, Ministry of Finance, Malawi
Obadiah Mailafia, Chariman, Center for Policy and Economic Research, Nigeria
During this panel, participants will share observations of the effects of the crisis on their economies and future plans. They will also share existing tools to safeguard their investments.
The session will include a discussion on how they are mitigating the impacts and how they
expect to cover the cost. Panelists and the audience will be asked to address the following
questions.
Registration
Immediate Actions Being Taken to Manage the Impact
Is the situation different for middle vs. lower income countries?
How does the current financial crisis affect a country’s ability to borrow?
Is the situation different for resource rich countries?
Can we learn anything from previous financial crises (e.g. Asia and Latin America)?
How are recipient countries more efficiently managing their donor aid?
What is the role of the government in solving financial sector issues?
This document summarizes a breakfast teach-in on the Eurozone sovereign debt crisis and its potential impacts on UK pension funds. It provides background on the crisis and analyzes two sample pension fund allocations (A and B) under three potential Eurozone scenarios: a Greek default, breakup of the Eurozone periphery, and a full breakup of the Euro currency. Allocation B is found to better manage risks through a reduced equity allocation and increased allocation to less volatile assets.
Ivo Pezzuto - "GREXIT": AVOIDED FOR NOW! (The Global Analyst Magazine August...Dr. Ivo Pezzuto
The threat of an unceremonious exit from the Euro Zone might have receded for the beleaguered Greece, at least for now. However, there is no guarantee the present bailout deal is enough to ensure the European economy’s return to normalcy. Given, the billion euro question is: Has it done enough to avoid exiting the Euro Zone? Whatever, one thing is for sure, the collapse of Greek economy could also mean collateral zone for one of the oldest and strongest trade block – Eurozone.
Draghinomics Introduces Quantitative Easing to the Eurozone QNB Group
The European Central Bank announced its first quantitative easing program to stimulate the stagnant eurozone economy. It will purchase private sector assets starting in October 2014 to expand its balance sheet by €1 trillion, following other central banks. This is expected to depreciate the euro relative to the dollar due to the larger growth in the ECB's balance sheet compared to the slowing Federal Reserve program. The quantitative easing may help the eurozone avoid deflation and recover economic activity.
Presentation by Andris Vilks, Minister of Finance, Republic of Latvia at the Bank of Latvia conference "Economic Adjustment under Sovereign Debt Crisis: Can Experience of the Baltics Be Applied to Others?"
Riga, November 2, 2012.
The public debt crisis is not limited to Greece or to the Euro area. In fact, several developed economies face rapidly growing debt-to-GDP ratios, which raise doubts about their long-term solvency. Thus, suggesting that the Eurozone is undergoing a currency crisis or is in danger of disintegration is not the right diagnosis (or at least premature). However, if prudent fiscal policies, fiscal discipline and far-reaching structural reforms are not undertaken soon, both the EU and EMU may face serious internal tensions and obstacles to future economic growth.
Authored by: Marek Dąbrowski
Published in 2010
Governor Olli Rehn: Going digital – trends in payments during and after the p...Suomen Pankki
Governor Olli Rehn: Going digital – trends in payments during and after the pandemic, Opening of the 10th Economics of Payments conference, 20 October 2021
What should investors do to protect against an imminent raise in interest rat...David Osio
The Federal Reserve has indicated it plans to raise interest rates for the first time in over 9 years as a preventative measure rather than in reaction to current economic conditions. This will affect emerging market debt securities denominated in US dollars the most. The document recommends reducing credit and duration risk in bond portfolios by focusing on maturities between 18-24 months and reallocating to longer-term securities at higher rates once hikes begin. It also suggests investing in consumer staples, healthcare, financials stocks and hedge funds for their ability to capture opportunities arising from rate hikes.
This document is a paper by Lubomira Anastassova titled "Institutional Arrangements of Currency Boards - Comparative Macroeconomic Analysis". The paper examines the differences in institutional frameworks for currency board arrangements across countries and assesses the impact of currency boards on macroeconomic indicators like inflation, interest rates, and economic growth. It finds that currency board countries exhibit approximately 3% lower annual inflation and 1% higher economic growth on average compared to other countries with pegged exchange rates. The paper analyzes the characteristics of currency boards, how their institutional arrangements can support successful economic development, and presents the results of a regression analysis testing the impact of currency boards on macroeconomic performance.
Economic adjustment in the euro area and the experience of the BalticsLatvijas Banka
Presentation by Hans-Joachim Klöckers, Deputy Director General Economics, European Central Bank at the Bank of Latvia conference "Economic Adjustment under Sovereign Debt Crisis: Can Experience of the Baltics Be Applied to Others?"
Riga, November 2, 2012.
Ardo Hansson. European recovery in longer-term perspective – a view from a (s...Eesti Pank
Governor Ardo Hansson participated in a panel discussion at the seminar organised by the Peterson Institute for International Economics in Washington. 09.10.2013
"Debt Sustainability and the Terms of Official Support", by Giancarlo Corsett...ADEMU_Project
This document discusses how the terms of official lending can impact assessments of whether a country can sustain its debt levels. It presents a three-period model to illustrate how official lending with certain terms, such as long-term maturities at concessional rates, can restore debt sustainability by reducing the risk of default. The model is then used to analyze Portugal's debt crisis from 2011-2015, finding that official lending through the IMF and ESM helped lower borrowing costs and change the composition of Portugal's debt in a way that matches the data. Counterfactual analyses suggest debt sustainability thresholds are more sensitive to debt maturity terms than interest rate spreads.
Monetary policy in the euro area: lessons from the crisis and challenges aheadLatvijas Banka
The document discusses lessons from the euro area crisis and ongoing challenges for monetary policy. It notes that while the ECB effectively dealt with liquidity issues, solvency problems involving banks and sovereigns were postponed. This led to a correlation between bank and sovereign risk that hindered the real economy. Current challenges include dealing with bank restructuring and maintaining accommodative financial conditions to support recovery, as interest rates remain too tight.
Wouter Den Haan's discussion of "Sovereign Default: The Role of Expectations"ADEMU_Project
1) The paper shows that multiplicity of equilibria in sovereign debt models depends crucially on small changes in timing assumptions and whether the borrower chooses the amount borrowed or amount to be paid back.
2) The model implies that self-fulfilling beliefs can generate sovereign debt crises when the distribution of GDP has multiple peaks, such as recession and expansion regimes.
3) Timing assumptions are important, as creditors moving first means the borrower takes the interest rate as given, increasing the risk of multiple equilibria.
This document discusses whether debt levels are too high in the Euro area, specifically looking at Greece and other high-debt countries like Italy. For Greece, the author argues debt is unsustainable and needs to be reduced through an official debt restructuring. For other countries, debt may be sustainable now but leaves them vulnerable to shocks that could trigger another crisis. Two approaches for reducing debt are discussed: gradual fiscal adjustment or conducting a debt swap operation where some national debts are exchanged for Euro area debt. However, both approaches face challenges in providing credible commitment to debt reduction.
A minimal moral hazard central stabilization capacity for the EMU based on wo...ADEMU_Project
This document proposes an "export-based stabilisation capacity" (ESC) for the Eurozone that allows for cross-border transfers in response to changes in world trade across different sectors. The ESC would provide transfers from countries less affected by a decline in world trade in a given sector to countries more dependent on that sector. This is intended to cushion economic shocks while avoiding moral hazard concerns since the transfers are based on exogenous world trade factors. A simulation using historical export data finds the transfers would be countercyclical and stabilize over time, suggesting the risk of permanent transfers is low. However, timely availability of sectoral trade data could pose practical challenges to implementation.
This document summarizes the key points of the paper "Conditional eurobonds and the eurozone sovereign debt crisis" by John Muellbauer. The paper proposes "Euro-insurance bonds" where countries pay risk premiums based on their economic fundamentals like competitiveness, debt levels, and housing markets. An econometric model is used to measure the impact of these fundamentals on bond spreads against German bonds. While the overall goal of insuring countries against default is clear, some aspects of the methodology and implications require further explanation, such as the choice of economic fundamentals and the use of additional fixed effects and collateral.
The document provides an overview of the Banking Union, which was established by the EU in response to the financial crisis. It discusses the key components of the Banking Union, including the Single Supervisory Mechanism (SSM) run by the ECB, the Single Resolution Mechanism (SRM) and Single Resolution Fund, and the Bank Recovery and Resolution Directive. It also examines issues like ensuring the SSM and SRM can make decisions efficiently, whether the Single Resolution Fund is adequately sized, and the relationship between Total Loss Absorbing Capacity (TLAC) and Minimum Requirement for Own Funds and Eligible Liabilities (MREL). Overall, the document analyzes the EU's Banking Union framework and
Euro summit kicking the can down the road once more-Markets Beyond
The Eurozone leaders reached an agreement to address Greece's debt crisis with a 50% nominal write-down of Greek debt held by private creditors, preferential refinancing of the remaining debt, and closer supervision of Greece's adherence to reforms. However, the agreement lacks many important details and only kicks the can down the road by failing to adequately address the underlying issues preventing Greece's economic growth. While providing short-term relief, the measures will not be enough to solve the region's sovereign debt problems in the long run. The agreement benefits China the most as a large holder of European debt.
This document summarizes and analyzes a policy paper that proposes a two-step market-based approach to debt reduction in the eurozone without default.
Step 1 involves the EFSF exchanging existing Greek, Irish, and Portuguese government debt for EFSF bonds at market prices over 90 days. Step 2 assesses debt sustainability and either writes down debt to market levels if sufficient, or agrees to lower interest rates with GDP warrants. The goal is to restore private market access without seniority over remaining private claims. The ECB would stop bond market interventions, and the IMF could provide bridge financing until fiscal adjustments are complete.
The document provides an overview of the United Kingdom's economy and banking system. It summarizes key economic indicators like GDP growth, inflation, and unemployment. It then describes the Bank of England as the central bank and its roles in monetary policy and financial stability. Finally, it analyzes HSBC bank's regional performance in Europe, Asia, the Middle East, North America, and Latin America in 2011. HSBC saw strong profits in Asia but losses in North America.
The document discusses arguments for fiscal centralization in the European Union based on lessons from other federal states. It argues that having decentralized fiscal policy alongside centralized monetary policy in the EU causes problems with adjustment to economic shocks and freeriding. The authors conclude that the EU should consider enforcing a no-bailout clause, allowing some independence for member states' revenue and spending, a system of fiscal transfers during crises, developing a euro bond market, and maintaining some flexibility.
The very expansive and unconventional monetary policy of the ECB reduced the tensions of the Euro debt crisis at the price of persistently very low interest rates.
While the ECB was right to act at the peak of the crisis, the risks of the low-interest rate environment become increasingly obvious. Private savings suffer from very low
yields, which is particularly detrimental for long-term retirement savings. Moreover, financial stability risks could arise, as ultra-low interest rates can cause a search for
yield among investors. Banks and life insurance companies are exposed to reduced interest profits respectively lower yields. While life insurance companies can cope with a shorter period of low interest rates, a longer period, however, poses challenges, as contracts with guaranteed interest rates have to be served.
The low interest rate environment – Causes, effects and a way outI W
The document discusses the causes and effects of the long period of low interest rates in Europe following the global financial crisis and Euro debt crisis. It notes that while the ECB's expansive monetary policy helped reduce tensions, the low rate environment poses increasing risks. Savers are disadvantaged by low yields, while debtors benefit. There are also financial stability risks as investors search for higher yields. The document argues that economic conditions have improved, making an interest rate turnaround possible in mid-2015, but the ECB should implement any rate increases gradually to allow markets to adapt.
The public debt crisis is not limited to Greece or to the Euro area. In fact, several developed economies face rapidly growing debt-to-GDP ratios, which raise doubts about their long-term solvency. Thus, suggesting that the Eurozone is undergoing a currency crisis or is in danger of disintegration is not the right diagnosis (or at least premature). However, if prudent fiscal policies, fiscal discipline and far-reaching structural reforms are not undertaken soon, both the EU and EMU may face serious internal tensions and obstacles to future economic growth.
Authored by: Marek Dąbrowski
Published in 2010
Governor Olli Rehn: Going digital – trends in payments during and after the p...Suomen Pankki
Governor Olli Rehn: Going digital – trends in payments during and after the pandemic, Opening of the 10th Economics of Payments conference, 20 October 2021
What should investors do to protect against an imminent raise in interest rat...David Osio
The Federal Reserve has indicated it plans to raise interest rates for the first time in over 9 years as a preventative measure rather than in reaction to current economic conditions. This will affect emerging market debt securities denominated in US dollars the most. The document recommends reducing credit and duration risk in bond portfolios by focusing on maturities between 18-24 months and reallocating to longer-term securities at higher rates once hikes begin. It also suggests investing in consumer staples, healthcare, financials stocks and hedge funds for their ability to capture opportunities arising from rate hikes.
This document is a paper by Lubomira Anastassova titled "Institutional Arrangements of Currency Boards - Comparative Macroeconomic Analysis". The paper examines the differences in institutional frameworks for currency board arrangements across countries and assesses the impact of currency boards on macroeconomic indicators like inflation, interest rates, and economic growth. It finds that currency board countries exhibit approximately 3% lower annual inflation and 1% higher economic growth on average compared to other countries with pegged exchange rates. The paper analyzes the characteristics of currency boards, how their institutional arrangements can support successful economic development, and presents the results of a regression analysis testing the impact of currency boards on macroeconomic performance.
Economic adjustment in the euro area and the experience of the BalticsLatvijas Banka
Presentation by Hans-Joachim Klöckers, Deputy Director General Economics, European Central Bank at the Bank of Latvia conference "Economic Adjustment under Sovereign Debt Crisis: Can Experience of the Baltics Be Applied to Others?"
Riga, November 2, 2012.
Ardo Hansson. European recovery in longer-term perspective – a view from a (s...Eesti Pank
Governor Ardo Hansson participated in a panel discussion at the seminar organised by the Peterson Institute for International Economics in Washington. 09.10.2013
"Debt Sustainability and the Terms of Official Support", by Giancarlo Corsett...ADEMU_Project
This document discusses how the terms of official lending can impact assessments of whether a country can sustain its debt levels. It presents a three-period model to illustrate how official lending with certain terms, such as long-term maturities at concessional rates, can restore debt sustainability by reducing the risk of default. The model is then used to analyze Portugal's debt crisis from 2011-2015, finding that official lending through the IMF and ESM helped lower borrowing costs and change the composition of Portugal's debt in a way that matches the data. Counterfactual analyses suggest debt sustainability thresholds are more sensitive to debt maturity terms than interest rate spreads.
Monetary policy in the euro area: lessons from the crisis and challenges aheadLatvijas Banka
The document discusses lessons from the euro area crisis and ongoing challenges for monetary policy. It notes that while the ECB effectively dealt with liquidity issues, solvency problems involving banks and sovereigns were postponed. This led to a correlation between bank and sovereign risk that hindered the real economy. Current challenges include dealing with bank restructuring and maintaining accommodative financial conditions to support recovery, as interest rates remain too tight.
Wouter Den Haan's discussion of "Sovereign Default: The Role of Expectations"ADEMU_Project
1) The paper shows that multiplicity of equilibria in sovereign debt models depends crucially on small changes in timing assumptions and whether the borrower chooses the amount borrowed or amount to be paid back.
2) The model implies that self-fulfilling beliefs can generate sovereign debt crises when the distribution of GDP has multiple peaks, such as recession and expansion regimes.
3) Timing assumptions are important, as creditors moving first means the borrower takes the interest rate as given, increasing the risk of multiple equilibria.
This document discusses whether debt levels are too high in the Euro area, specifically looking at Greece and other high-debt countries like Italy. For Greece, the author argues debt is unsustainable and needs to be reduced through an official debt restructuring. For other countries, debt may be sustainable now but leaves them vulnerable to shocks that could trigger another crisis. Two approaches for reducing debt are discussed: gradual fiscal adjustment or conducting a debt swap operation where some national debts are exchanged for Euro area debt. However, both approaches face challenges in providing credible commitment to debt reduction.
A minimal moral hazard central stabilization capacity for the EMU based on wo...ADEMU_Project
This document proposes an "export-based stabilisation capacity" (ESC) for the Eurozone that allows for cross-border transfers in response to changes in world trade across different sectors. The ESC would provide transfers from countries less affected by a decline in world trade in a given sector to countries more dependent on that sector. This is intended to cushion economic shocks while avoiding moral hazard concerns since the transfers are based on exogenous world trade factors. A simulation using historical export data finds the transfers would be countercyclical and stabilize over time, suggesting the risk of permanent transfers is low. However, timely availability of sectoral trade data could pose practical challenges to implementation.
This document summarizes the key points of the paper "Conditional eurobonds and the eurozone sovereign debt crisis" by John Muellbauer. The paper proposes "Euro-insurance bonds" where countries pay risk premiums based on their economic fundamentals like competitiveness, debt levels, and housing markets. An econometric model is used to measure the impact of these fundamentals on bond spreads against German bonds. While the overall goal of insuring countries against default is clear, some aspects of the methodology and implications require further explanation, such as the choice of economic fundamentals and the use of additional fixed effects and collateral.
The document provides an overview of the Banking Union, which was established by the EU in response to the financial crisis. It discusses the key components of the Banking Union, including the Single Supervisory Mechanism (SSM) run by the ECB, the Single Resolution Mechanism (SRM) and Single Resolution Fund, and the Bank Recovery and Resolution Directive. It also examines issues like ensuring the SSM and SRM can make decisions efficiently, whether the Single Resolution Fund is adequately sized, and the relationship between Total Loss Absorbing Capacity (TLAC) and Minimum Requirement for Own Funds and Eligible Liabilities (MREL). Overall, the document analyzes the EU's Banking Union framework and
Euro summit kicking the can down the road once more-Markets Beyond
The Eurozone leaders reached an agreement to address Greece's debt crisis with a 50% nominal write-down of Greek debt held by private creditors, preferential refinancing of the remaining debt, and closer supervision of Greece's adherence to reforms. However, the agreement lacks many important details and only kicks the can down the road by failing to adequately address the underlying issues preventing Greece's economic growth. While providing short-term relief, the measures will not be enough to solve the region's sovereign debt problems in the long run. The agreement benefits China the most as a large holder of European debt.
This document summarizes and analyzes a policy paper that proposes a two-step market-based approach to debt reduction in the eurozone without default.
Step 1 involves the EFSF exchanging existing Greek, Irish, and Portuguese government debt for EFSF bonds at market prices over 90 days. Step 2 assesses debt sustainability and either writes down debt to market levels if sufficient, or agrees to lower interest rates with GDP warrants. The goal is to restore private market access without seniority over remaining private claims. The ECB would stop bond market interventions, and the IMF could provide bridge financing until fiscal adjustments are complete.
The document provides an overview of the United Kingdom's economy and banking system. It summarizes key economic indicators like GDP growth, inflation, and unemployment. It then describes the Bank of England as the central bank and its roles in monetary policy and financial stability. Finally, it analyzes HSBC bank's regional performance in Europe, Asia, the Middle East, North America, and Latin America in 2011. HSBC saw strong profits in Asia but losses in North America.
The document discusses arguments for fiscal centralization in the European Union based on lessons from other federal states. It argues that having decentralized fiscal policy alongside centralized monetary policy in the EU causes problems with adjustment to economic shocks and freeriding. The authors conclude that the EU should consider enforcing a no-bailout clause, allowing some independence for member states' revenue and spending, a system of fiscal transfers during crises, developing a euro bond market, and maintaining some flexibility.
The very expansive and unconventional monetary policy of the ECB reduced the tensions of the Euro debt crisis at the price of persistently very low interest rates.
While the ECB was right to act at the peak of the crisis, the risks of the low-interest rate environment become increasingly obvious. Private savings suffer from very low
yields, which is particularly detrimental for long-term retirement savings. Moreover, financial stability risks could arise, as ultra-low interest rates can cause a search for
yield among investors. Banks and life insurance companies are exposed to reduced interest profits respectively lower yields. While life insurance companies can cope with a shorter period of low interest rates, a longer period, however, poses challenges, as contracts with guaranteed interest rates have to be served.
The low interest rate environment – Causes, effects and a way outI W
The document discusses the causes and effects of the long period of low interest rates in Europe following the global financial crisis and Euro debt crisis. It notes that while the ECB's expansive monetary policy helped reduce tensions, the low rate environment poses increasing risks. Savers are disadvantaged by low yields, while debtors benefit. There are also financial stability risks as investors search for higher yields. The document argues that economic conditions have improved, making an interest rate turnaround possible in mid-2015, but the ECB should implement any rate increases gradually to allow markets to adapt.
QE has become an integral part of monetary policy in a number of countries over the last ten years. Essentially it has been part of a strategy of cheap money brought in by central banks as a policy response the 2007-08 Global Financial Crisis amid fears of a return to deflationary depression experienced in the 1930s. Economic historians will surely debate the role of Quantitative Easing (QE) in staving off a depression for many years to come.
Ireland’s EU-IMF Program: A Safe Harbor in a Perfect StormLatvijas Banka
The document summarizes Ireland's EU-IMF program from 2010-2014 that aimed to restore financial stability and regain market access after Ireland faced severe challenges from the global financial crisis and euro crisis. The program focused on upfront actions like evaluating bank balance sheets, a clear plan for restructuring banks, and large fiscal consolidation. Euro area policies like improved financing terms and ECB commitments were also essential to the program's success. By mid-2012, Ireland began recovering as hiring and investment increased and it gradually regained market access, though work remains to fully repair the banking sector and reduce high debt levels. The IMF assessed that careful phasing of financial and fiscal reforms while protecting growth was important to program effectiveness.
Understanding Risk Management and Compliance, May 2012Compliance LLC
The document discusses several topics related to banking regulation:
1) It discusses the EBA's work over the past year to strengthen bank capital positions in response to the financial crisis, including stress tests and recommendations to raise over €115 billion in capital.
2) It outlines the EBA's goal of establishing a Single Rulebook to harmonize banking rules across the EU and prevent a relaxation of standards.
3) It focuses on the EBA's work developing regulatory technical standards for defining bank capital and ensuring high quality capital instruments are used across all member states.
The document summarizes the evolution and current state of the European Monetary Union and efforts to ensure its stability. It discusses how the EMU has faced challenges like fiscal discipline issues and economic imbalances among members. Reforms at national and European levels are aiming to address these issues through measures like fiscal consolidation, structural reforms, stronger governance, and new financial stability institutions. The European Financial Stability Facility (EFSF) has provided financial assistance to Ireland and Portugal and seen strong investor demand for its bonds. Its role and lending capacity have been enhanced to maintain stability in the Eurozone.
Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the economy. It works by having the central bank purchase financial assets to inject money into the economy. The document then discusses (1) how QE creates money, (2) the economic effects of QE including lower interest rates and higher stock prices, and (3) the risks of QE such as wealth inequality and rising future interest rates. Examples of QE programs in Japan, the US, and Europe are provided. While QE has had some positive effects, its overall effectiveness depends on various economic conditions and factors. Central banks now face challenges in exiting from QE programs as bond holdings are unwound.
The recent financial market turbulence caused considerable divergence in the banking market interest rate determination process of the euro area member countries (e.g. Illes and Lombardi 2013, Paries et al., 2014). The purpose of this study is to investigate the factors determining the banking market interest rates in the euro area countries during the pre-crisis and the post-crisis periods, and to highlight possible regional asymmetries in the interest rate determination processes. To this end, we employ a set of country specific factors, such as variables capturing macroeconomic conditions, financial risk and loans market conditions, together with common monetary policy factors at euro-zone level. Instead of using specific bank market interest rates, we base our analysis on the ECB’s harmonized cost of bank borrowing indicators of euro area members, in order to avoid cross-country and cross-product data heterogeneity. With the use of principal component analysis, we obtain a number of latent factors that describe unobserved movements in the cost of borrowing, originating either in certain Euro-zone regions or outside the euro area, or constitute common factors for all euro area members. Such factors are identified as macroeconomic conditions, financial risk, loans market conditions and euro area monetary policy variables. These obtained factors, are then used in order to estimate country specific structural equations of the cost of bank borrowing determination. Employing cluster analysis on the parameter coefficients of these models, we then identify euro area regions with similar characteristics regarding the determination of the cost of borrowing. Next, the member states are pooled within the regions identified and structural models are estimated for these regions. By comparing the estimated distinct regional models and the different dynamic effects of the latent factor shocks across the regions, we highlight the differences in the determination of the cost of bank borrowing between the euro-zone core and periphery, and how it has been evolved through the period of the 2007-9 global financial crisis and the subsequent euro area debt crisis.
This document discusses the UK's policy response to the recent recession, which included reducing interest rates and quantitative easing. It also discusses international regulations like Basel III that increased capital ratio requirements for banks. The UK saw smaller employment declines than GDP declines during the recession due to wage moderation and employer financial stability. Ongoing issues discussed include the Eurozone debt crisis, financial sector regulation, and the road to economic recovery.
This document summarizes the risks facing the modern global economic system. It outlines several macroeconomic risks such as uneven global growth and emerging market vulnerabilities. It also discusses risks from changes in monetary policy like the tapering of quantitative easing. Several negative internal factors are mentioned like the sovereign debt crisis in Europe and the property bubble in China. However, some positive internal factors may help like improved risk management and regulation. The document examines the potential effects of these risks, like reversals of capital flows to emerging markets and rising emerging market risk premiums. Charts show trends in government and private debt levels that could exacerbate problems. The conclusion discusses the possibility of high yield bond defaults and liquidity crises without reforms and coordination between institutions.
The Euro in Crisis: Decision Time at the European Central Bank Harsh Chitroda
The eurozone crisis was caused by a balance-of-payments crisis (a sudden stop of foreign capital into countries that had substantial deficits and were dependent on foreign lending). The crisis was worsened by the inability of states to resort to devaluation (reductions in the value of the national currency)
Eurozone Crisis : A case study on GreeceAniket Pant
Our group was required to do a presentation for Financial Management on the Euro Zone Crisis. We took the example of Greece and did the study. Here are our slides.
1. The document discusses quantitative easing (QE) programs in Europe, Japan, the US, and UK. It analyzes the ECB's planned €1.1 trillion QE program for the Eurozone.
2. Critics argue QE could lead to fiscal costs for taxpayers if bond-holding countries default, depreciate the euro, and reduce pressure for structural reforms. Supporters counter that the risks are low and QE aims to stimulate growth and preserve the Eurozone.
3. The ECB plans to purchase sovereign and private bonds to increase the money supply and lower interest rates. This could help banks by making borrowing cheaper and increasing asset values, though it also threatens bank margins. Overall the
This document discusses the sovereign debt crisis in the Eurozone. It outlines several causes of the crisis, including the collapse of the US housing market and Greece's high levels of borrowing. The impacts included rising public debt, unemployment, GDP declines, and the potential break-up of the Eurozone. Solutions from the European Central Bank involved lowering interest rates and implementing bond-buying programs. Lessons for the future are the need for fiscal discipline, structural reforms, and stronger financial regulation to prevent another crisis.
Euro area monetary policy: effects and side effectsEesti Pank
The document discusses the side effects of accommodative monetary policy in the euro area. Some key points:
1) In the euro area as a whole, savings from lower interest costs stemming from monetary policy have been used to loosen fiscal policy. However, countries have responded differently, with some using savings to reduce debt.
2) The impact on structural reforms is mixed - there has been progress in some areas like labor markets but not in improving institutions. It is difficult to establish the impact of monetary policy.
3) The impact on productivity growth is unclear, but evidence suggests loose monetary conditions have limited creative destruction and helped weak firms.
4) There are some financial stability concerns, especially regarding commercial property
The document discusses the European debt crisis and its impact on pensions. It identifies four key points: 1) the debt crisis poses risks to both funded and unfunded pension systems, 2) implicit pension liabilities should be considered, 3) European politicians need action to restore confidence and contain the debt, and 4) structural reforms are needed and budget deficits must be reduced. It then provides context on the history and causes of the debt crisis, and analyzes four scenarios for resolving it based on regaining market confidence in the short-term and implementing structural reforms in the long-term.
- Hidden risks exist in markets from "bears" that are in plain sight and "bergs" that are hidden in the system.
- There is little compensation for risk in corporate debt markets globally as yields have fallen while risks of default have not decreased. Open-ended funds have also increasingly invested in corporate bonds.
- Diagnostic tools are needed to understand potential amplification and firesales from linkages between open-ended funds, dealers, and markets during periods of stress. System simulations can help explore these dynamics.
Declaracion de Mario Draghi (2 de agosto de 2012)ManfredNolte
The ECB decided to keep interest rates unchanged following a decrease the previous month. Inflation is expected to decline in 2012 and be below 2% in 2013, while economic growth in the euro area remains weak. The Governing Council discussed undertaking outright open market operations and other non-standard measures to address high risk premia in bond markets, which are hindering monetary policy transmission. Policymakers need to push ahead with fiscal consolidation, reforms, and institution building to create conditions for risk premia to disappear.
This document provides an overview of liability management in the context of interest rate risk. It discusses key concepts such as active vs passive liability management, interest rate risk, present value, duration, market value at risk, and cost at risk. It proposes four pillars of liability management: minimize bets on markets, avoid negative carry, exploit market inefficiencies, and diversify risks. Several examples and case studies are provided to illustrate concepts related to interest rate derivatives.
1. Responses to the euro area crisis
Benoît Cœuré
Member of the Executive Board
European Central Bank
The Interactive Museum of Economics
Mexico City, 20 July 2012
2. In a nutshell
• The crisis has been generated by excessive indebtedness
and imbalances, whether in the public or private sector
• Depending on countries, excessive indebtedness has been
compounded with
• real estate and housing bubbles
• divergent developments in competitiveness
• financial / banking fragilities
• Rising country risk has resulted in market fragmentation,
undermining some of the benefits of the monetary union
The crisis
2
3. Short and long-term solutions
• Fiscal and monetary policy authorities in the euro area have
taken a number of short-term measures to fight the crisis,
which, although essential, are by their nature temporary
• Monetary union came with a strong and independent
central bank, but without fully-fledged institutions in charge
of economic, fiscal and financial policies
• Progress has been made towards improving governance and
incentives, but long-term solutions require the creation of
such fully-fledged institutions, based on a democratic
process, and the fixing of fundamentals via structural
reforms
Solutions
3
5. Policy-controlled interest rates
Credit supply,
bank interest rates
Inflationary
expectations
Long-term interest rates,
asset prices
Exchange rates
Import prices
Interest rate channel
Supply and demand in goods and labour marketsWage and price setting
Price developments
Liquidity channel
Monetary policy transmission channels
5
6. Inflation volatility falls despite larger energy price volatility
Larger energy price volatility boosts inflation volatility
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1991-2010 1991-1998 1999-2010
Cov(core,energy) Var(core)
Cov(food,core) Var(food)
Cov(energy,food) Var(energy)
Headline HICP
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1991-2010 1991-1998 1999-2010
Cov(core,energy) Var(core)
Cov(food,core) Var(food)
Cov(energy,food) Var(energy)
Headline PCE
Energy price shocks and inflation volatility
US: Decomposition of InflationVolatilityEuro Area: Decomposition of InflationVolatility
Price stability has been delivered
6
7. A stable macro-economic environment
Source: OECD and ECB calculations.
Note: Observations refer to the average annual output growth and inflation between 1999 and 2011.
7
UKUSA
Japan
Australia
Switzerland
Norway
0.0
1.0
2.0
3.0
4.0
5.0
0.0 1.0 2.0 3.0 4.0 5.0
Standarddeviationofinflation
Standard deviation of output
Euro area
Hungary
Island
Mexico
Brasil
China
Poland
Chile
Israel
Cezch rep.
Sweden
Korea
8. Stable inflation expectations
Point expectations and risk premium
Source: García, J.A. and T. Werner (2010), “Inflation risks and Inflation risk premia”, ECB Working Paper No 1162.
Note: Inflation expectations are BEIR. Last observation: October 2010.
0
1
2
3
4
5
6
7
8
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
0
1
2
3
4
5
6
7
8
10-year Inflation expectations 10-year Inflation risk premium
10-year real bond yield 10-year nominal bond yield
8
9. Sources: BEA, Eurostat. Notes: 1999Q1 =100. Last observation: 2012Q1.
GDP per capita growth
Stability in euro area achieved with comparable average per-capita growth performance to the US
9
Strong growth performance
85
90
95
100
105
110
115
120
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Euro area US
10. Policy-controlled interest rates
Credit supply,
bank interest rates
Inflationary
expectations
Long-term interest rates,
asset prices
Exchange rates
Import prices
Interest rate channel
Supply and demand in goods and labour marketsWage and price setting
Price developments
The crisis:Transmission impairments
Liquidity channel
10
12. Note: data in percent. The lower and the upper bound are the deposit facility and the marginal lending facility rate respectively.
Last observation: 11 July 2012.
Monetary policy response post-Lehman
Monetary policy in the first phase of the crisis
12
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12
deposit rate
EONIA
main refinancing rate/
minimum bid rate
MRO rates
(marginal/fixed)
marginal lending rate
9 Aug 2007 15 Sept 2008 7 May 2010
13. Policy-controlled interest rates
Credit supply,
bank interest rates
Inflationary
expectations
Long-term interest rates,
asset prices
Exchange rates
Import prices
Interest rate channel
Supply and demand in goods and labour marketsWage and price setting
Price developments
Liquidity channel
Transmission plumbing
13
14. First phase of the crisis:
• Full accommodation of liquidity needs at a fixed rate
• Extended range of collateral for open market operations with
stringent risk control
• Extended range of maturities for open market operations up to 1
year
• Provision of foreign currency denominated liquidity
• Outright purchases of covered bonds
Monetary policy measures in the euro area
14
15. 15
External financing for non-financial corporations
0
20
40
60
80
100
Euro Area United States
0
20
40
60
80
100
Banks
Non-Bank
Non-Bank
Banks
Source: ECB Monthly Bulletin April 2009
Note: Breakdown of the sources of external financing of non-financial corporations, in percent,
average 2004 – 2008
Euro area United States
16. Source: ECB. Last observations: 1 July 2012.
The Eurosystem balance sheet
Monetary policy in the first phase of the crisis
16
-1200
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
1200
1400
1600
-1200
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
1200
1400
1600
Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12
EUR bn
main refinancing operation marginal lending facility
1-maintenance period refinancing operation 3-month longer-term refinancing operation
6-month longer-term refinancing operation 1-year longer-term refinancing operation
3-years longer-term refinancing operation covered bond purchase programme and securities markets programme
fine-tuning providing operation fine-tuning absorbing operation
deposit facility liquidity needs
9 Aug 2007
15 Sep 2008 3 Dec 2009 7 May 2010
Intensification of the
financial turbulence
Initiation of gradual
phasing out
Start of the sovereign
debt crisis
Beginning of the
financial turbulence
Introduction of
3-yr LTROs
22 Dec 2011
17. Sovereign bond spreads
Sources: Thomson Reuters Datastream and ECB calculations. Note: bond yield spreads are vis-à-vis the German 10-year
government bond, end-of-day data (last value 11 Jul 2012, 17:00 CET).
Second phase of the crisis: credit risk shocks
17
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12
Greece
Portugal
Ireland
Spain
Italy
France
18. Sovereign credit risk and bank CDS
18
Annual change in individual bank CDS in 2011
and exposure to stressed sovereigns
(in b.p.; portfolio share)
-150
100
350
600
850
1100
1350
0 0.2 0.4 0.6 0.8 1
Source: EBA (8 December), Datastream, ECB
calculations. – Notes: Annual changes in banks’ CDS
(x-axis) vs. proportion of banks’ sovereign exposure to
countries under stress relative to their overall direct
sovereign exposures (y -axis). – 4 3 EU banks from
Dec’11 EBA sample (correlation 66%).
Banks Lending Standards (Net Percentage)
Source: BLS
-40
-20
0
20
40
60
80
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Loans to enterprises
Loans for house purchase
Consumer credit
Transmission with credit risk shocks
19. First phase of the crisis:
• Full accommodation of liquidity needs at a fixed rate
• Extended range of collateral for open market operations with
stringent risk control
• Extended range of maturities for open market operations up to 1
year
• Provision of foreign currency denominated liquidity
• Outright purchases of covered bonds
Monetary policy measures in the euro area
Second phase of the crisis:
• Securities Markets Programme: Intervention in dysfunctional
segments of the securities debt market
• Lower minimum reserve requirements
• Further extension of collateral for open market operations with
stringent risk control
• Refinancing operations (“LTROs”) with a maturity of 3 years
19
20. Source: ECB. Last observations: 1 July 2012.
The Eurosystem balance sheet
Monetary policy in the second phase of the crisis
20
-1200
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
1200
1400
1600
-1200
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
1200
1400
1600
Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12
EUR bn
main refinancing operation marginal lending facility
1-maintenance period refinancing operation 3-month longer-term refinancing operation
6-month longer-term refinancing operation 1-year longer-term refinancing operation
3-years longer-term refinancing operation covered bond purchase programme and securities markets programme
fine-tuning providing operation fine-tuning absorbing operation
deposit facility liquidity needs
9 Aug 2007
15 Sep 2008 3 Dec 2009 7 May 2010
Intensification of the
financial turbulence
Initiation of gradual
phasing out
Start of the sovereign
debt crisis
Beginning of the
financial turbulence
Introduction of
3-yr LTROs
22 Dec 2011
21. 0
50
100
150
200
250
2007 2008 2009 2010 2011 2012
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012
Reduced funding stress and lower volatility following
the three-year LTROs
21
Source: Bloomberg
Last observation: 11 July 2012
Implied stock market
volatility in the euro area
3 month Euribor-OIS
spread (basis points)
Sources: Bloomberg and ECB calculation.
Last observation: 11 July 2012
22. Lower tail risk following the three-year LTROs
Source: ECB, Bloomberg. Based on options on DJ Eurostoxx 50. PDF’s show the probabilities that option market participants
attach to different future underlying instrument outcomes. Option-implied PDFs contain information on risk and market
uncertainty. Area under each line sum up to 1. Three-month horizon.
Probability density function of Eurostoxx 50
0
0.0002
0.0004
0.0006
0.0008
0.001
0.0012
0.0014
0.0016
0.0018
0.002
1250 1500 1750 2000 2250 2500 2750 3000 3250 3500
density
index points
5 August 2011
21 December 2011
5 March 2012
Early March
2012
Summer 2011
before SMP
Late
December 2011
22
24. • General principle:
• Impose controls on national budgets and the insurgence of
imbalances
⇒ build, on this basis, mechanisms for cross-country financial
solidarity
• Safety nets are provided by EFSF / ESM
• These funds ensure forms of ex-post cross-country risk sharing
• EFSF lending capacity €440 bn and ESM €500 bn, with total
combined lending capacity of €700 bn
• “Six-pack”
• Macroeconomic surveillance procedure which will detect and
correct divergences at an early stage
• Increased automaticity
• “Two-pack”
• Further strengthening of surveillance mechanisms in the euro area
A number of initiatives
24
25. • “Fiscal compact”
• A balanced budget rule, concerning structural budget
deficit and not its cyclical component, aimed to restore
market confidence and the ability of national fiscal
policy to smooth out the effect of adverse economic
shocks
• Fiscal compact requires national balanced budget rules
to be enforced at constitutional level or equivalent
A number of initiatives
25
26. • A number of Member States, and especially those under stress,
have embarked on ambitious programmes of structural reforms,
concerning
• Labour markets
• Product markets
• Pension and health care system
• Tax system
• Public administration reforms and expenditure reductions
• Business environment
• Competition law
• Sector regulators
• Judicial system
• Privatisations
Structural reforms
26
28. 1.An integrated financial framework
• Key elements:
• Single banking supervision
• Common deposit insurance and resolution framework
Four building blocks
28
29. 2.An integrated budgetary framework
• Establish mechanisms that prevent and correct
unsustainable fiscal policies
• Common agreements on upper limits to annual
budget balances and government debt levels for
individual Member States
• Issuance of sovereign debt beyond the commonly
agreed level will have to be justified and receive
prior approval
• Set up of a framework for budgetary discipline and
competitiveness
• Euro area fiscal body, such as a treasury office
Four building blocks
29
30. 3.An integrated economic policy framework
• Promote economic integration
• Ensure that unsustainable policies do not jeopardise the
stability of EMU
• Enforce the framework for policy coordination
Four building blocks
30
31. 4. Strengthening democratic legitimacy and
accountability
• Promote mechanisms to make joint decision-making
legitimate and accountable
Four building blocks
31
32. EU leaders have taken a number of steps based on
the report
• €120Bn “Compact for Growth and Jobs” and initiatives to
complete the single market for goods and services
• Single supervisory mechanism for banks, involving the ECB
• Once the single supervisory mechanism is in place, the
European Stability Mechanism (ESM) will be able to directly
recapitalise banks, with strict conditionality and control
• The EFSF / ESM can stabilise government bond markets also
for Member States which do not participate into IMF/EU
programmes, with ex-ante conditionality
The European Council of end-June 2012
32