OECD Seminar : „20 years after”
Panel 2 : Challenges and opportunities
Júlia Király
Deputy Governor, Magyar Nemzeti Bank
„This time it was not us”
• The epicentre of the crisis was not in emerging markets
• It was originating from developed countries …
– Macro imbalances (low interest rates, excess liquidity, housing market
boom, saving imbalance...)
– Financial market imbalances (yield hunting and greedy risk appetite,
originate-to-distribute model and subprime lending, „toxic assets”:
highly leveraged, structured products, high leverage, shadow banking
system...)
• …and spreading towards East through trade and financial
markets
• Strong financial and trade integration in the CEE region incl.
Hungary has led to fast spill-over of the crisis
Strong financial and economic integration of the
CEE countries
%
Level of foreign trade and financial integration in the countries of the region (2008)
90
Slovakia
80
Hungary
Export/GDP
70
Czech Rep.
60
50
Estonia
Bulgaria
40
Litvania
Poland
30
Latvia
20
Romania
10
0
0
10
20
30
40
50
Banking sector's foreign liabilities/GDP
60
70
80
%
Source: EKB, Eurostat.
Hungary’s high vulnerability triggered an avalanche
„Fiscal alcoholism”
Large public debt
1. Government risk
Integrated banking system with
developed countries
Overoptimistic expectations of
the households
Liberalised balance of capital
High HUF yields
Lending in foreign currency
150% loan to deposit ratio
2. Banking sector risk
External debt
High inflation
Private sector is responsible for 2/3 of the external debt
Net external debt as a percentage of GDP
70
%
%
70
Banking sector
Corporate sector
General government
Q2
2009 Q1
Q4
Q3
Q2
2008 Q1
Q4
Q3
Q2
2007 Q1
Q4
Q3
Q2
2006 Q1
Q4
Q3
Q2
0
2005 Q1
0
Q4
10
Q3
10
Q2
20
2004 Q1
20
Q4
30
Q3
30
Q2
40
2003 Q1
40
Q4
50
Q3
50
Q2
60
2002 Q1
60
Net external debt
Source: MNB.
The currency mismatch of the private sector
amounts to 40% of the GDP
70
Open FX position of the main sectors as a percentage of GDP
%
%
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
-10
2000 Q1
Q2
Q3
Q4
2001 Q1
Q2
Q3
Q4
2002 Q1
Q2
Q3
Q4
2003 Q1
Q2
Q3
Q4
2004 Q1
Q2
Q3
Q4
2005 Q1
Q2
Q3
Q4
2006 Q1
Q2
Q3
Q4
2007 Q1
Q2
Q3
Q4
2008 Q1
Q2
Q3
Q4
2009 Q1
Q2
-10
Household sector
Corporate sector
General government
Non-residents
Net external debt
Source: MNB.
9th October 2008
–
–
–
–
the fx swap interbank market collapsed
the secondary government paper market collapsed
the HUF depreciated hour by hour
the stock exchange trade was suspended because of the price fall
Response to the crisis
• Immediate remedies for the liquidity crisis:
– MNB: extended collaterals, LOLR in FX!, decreased reserve requirement
– Foreign parent banks: replacing money market funds
• Fixing balance sheets:
– Government: a sizeable and structural fiscal adjustment - pro-cyclical effects (cut
in social transfers, tax reshuffling: VAT and real estate tax↑, taxes on labor↓)
– Households: increase net saving position, decrease credit demand
– Companies: labor market adjustment, postponing investments
– Banks: deleverage, decrease L/D ratio and tighten credit conditions
• Monetary policy: focus on price stability AND financial stability
(forced tightening, slow easing)
Hungarian banks withstand the shock
6
%
Consolidated loan los rates in the
baseline and stress scenario
%
5.6
5
6
5
4
3.6
3.1
4
3.4
3
3
2
2
1
0.9
1.0
1
0
Stress
scenario
Stress
scenario
2008
Baseline
scenario
2007
Baseline
scenario
0
2009
2010
2009
2010
Source: MNB.
• Loan loss ratio is expected to
triple in 2009 and slightly
increase in 2010, while in the
stress scenario it would be 5-6
times higher in 2010 than in
2008
• Strong capital position is
expected to be kept along the
baseline scenario (end-2010
CAR above 11%)
• Recapitalisation needs (EUR
400-600 million for the whole
banking system) under a severe
stress scenario are manageable
Fast adjustment in the private and banking sector
Net financing position of the private sector and the loan-to-deposit ratio of the banking sector
170
%
%
170
160
160
150
150
140
140
130
130
The loan-to-deposit ratio (exchange rate adjusted)
120
The net financing position of the private sector as a percentage of GDP
Jun09
Mar09
Dec08
Sep08
Jun08
Mar08
Dec07
Sep07
Jun07
Mar07
Dec06
4
2
0
-2
-4
-6
-8
-10
Sep06
Jun06
HUF bn
Mar06
4
2
0
-2
-4
-6
-8
-10
120
Source: MNB.
Necessary adjustment can lead to deeper
recession and slower recovery
GDP growth rates in new EU countries
15
15
EC forecast
10
10
5
5
0
0
% -5
-5 %
-10
-10
-15
-15
Red lines: Baltic countries
Blue lines: Central EU. countries
Green lines: Mediterranean countries
-20
-20
BG
CZ
HU
PL
RO
SK
CY
MT
SI
EE
3q-11
1q-11
3q-10
1q-10
3q-09
1q-09
3q-08
1q-08
3q-07
1q-07
3q-06
1q-06
3q-05
1q-05
3q-04
1q-04
3q-03
1q-03
3q-02
1q-02
3q-01
1q-01
3q-00
-25
1q-00
-25
LT
LV
Source: Eurostat, EC.
The potential output can be negatively affected by the
crisis
• Productivity (TFP):
– Financing constraints disrupt daily operations
– Expenditure on innovation falls
– Sluggish reallocation between industries
• Labour input:
– Long-term unemployment erodes human capital
• Capital input:
– Capital accumulation slows down
– Excess capacities are scrapped
• But two country-specific factors reduce these negative effects:
– High risk premia fall with fiscal consolidation
– Government measures boost labor market participation
Financial crises reduce potential growth
although their long-term impact varies:
Lower long-run potential
growth rate (Japan)?
Full recovery in levels (Sweden)? One-time loss in output level
(Finland)?
Source: Impact of the current economic and financial crisis on potential output, European Economy, Occasional Papers No 49
IMF estimations
– Growth regression
– Potential growth is 0.6-2.5 pp
lower after the crisis
– Hungary is mostly affected
through its debt burden
Source: IMF Regional Outlook Europe, October 2009, Box 5
MNB re-evaluated its projections in August
Potential growth and its components in Hungary
6
-1
-1
TFP
Labour
Capital
2011
0
2010
0
2009
1
2008
1
2007
2
2006
2
2005
3
2004
3
2003
4
2002
4
2001
5
2000
5
Annual change (per cent)
Contribution to potential growth
(percentage point)
6
Potential growth rate (right scale)
Source: MNB.
…but Hungary with lower post-crisis potential
output growth is not an exception in CEE
European Commission estimations for the CEE region
– Potential growth slows to 2-2.5 per cent
– No recovery to pre-crisis growth rates (contrary to the euro area)
Source: Impact of the current economic and financial crisis on potential output, European Economy, Occasional Papers No 49
Note: calculations for the EU-8 aggregate (BG, CZ, EE, LT, LV, PL, RO)
MAIN LESSON FOR US:
THERE IS NO FREE LUNCH!
NEVER SUPPORT UNSUSTAINABLE EQUILIBRIUM!