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1 The Global Character of the Economic and Financial Crisis: Toward a New Financial Architecture by Tonny Lybek IMFs Resident Representative in Romania.

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Presentation on theme: "1 The Global Character of the Economic and Financial Crisis: Toward a New Financial Architecture by Tonny Lybek IMFs Resident Representative in Romania."— Presentation transcript:

1 1 The Global Character of the Economic and Financial Crisis: Toward a New Financial Architecture by Tonny Lybek IMFs Resident Representative in Romania and Bulgaria at Overcoming The Crisis Representation of The European Commission & European Institute of Romania Bucharest November 19, 2009

2 2 Agenda Character of Global Crisis: I: World Economic Outlook II: Regional Economic Outlook –From excessive credit growth to a credit crunch Changes in the Financial Architecture: III: The role of the IMF IV: Romania as a case in point V: Conclusion

3 3 I.1 Character of The Global Crisis Deepest global recession since the 1930s: In 2009, world growth is expected to decline (1.1 percent) for the first time in 60 years! International trade declining The phases: Sub-prime in the USA -> Financial fragility increases (from local to global) Sep. 15, 2008: Lehmans Bankruptcy -> Global downturn March 2009: Downturn looses speed -> Uneven recovery

4 4 I.2 How Long Will It Last? Financial shocks: Global integration larger than most realized! Financial shocks typically lasts longer! No obvious locomotive: Unemployment is lagging! Non-performing loans (NPLs) are lagging! Positive signs, but no time for complacency! Principles for exit (G20 in November 6–7):

5 5 I.3 World Economic Outlook

6 6 II.1 Character of The Regional Crisis The Good Times 2003–07Catching-up Vulnerabilities were building-up! Crisis came late to the region: The five stages: Denial -> Resentment -> Bargaining -> Depression -> Acceptance! Initial denial made it difficult to take early action! Impact of the global crisis Regional Economic Outlook

7 7 II.2 The Good Times 2003–07: Catching-up Central and Eastern Europe (CEE) real GDP growth averaged 6%: Strong global GDP growth boosted exports of CEE. Capital inflows boosted domestic demand: Liberalized, integrated, preparing for EU accession. Western Banks expanded aggressively in Emerging Europe. Fiscal deficits reduced and public debt ratios declined: Except in Hungary (public debt) and Romania (fiscal deficit) Private sector imbalances growing rapidly! Public finances looked much better than they were! Convergence process not fully appreciated!

8 8 II.3 Vulnerabilities building-up: Current account deficits widened to unsustainable levels! Exposures to Western European banks increased! Credit growth was very rapid => asset price booms! Much of the lending was in foreign currency Private sector external debt increased quickly to very high levels!

9 9 II.4 Current Account Deficits Increased

10 10 II.5 Increasing Exposure to Western Banks

11 11 II.6 Much of The Lending in FX

12 12 II.7 Impact of The Global Crisis Shock I: Lower external demand Shock II: Slowdown in capital inflows: Foreign direct investment (FDI) Funding ofmainly foreign-ownedbanks! Direct borrowing by non-financial companies Slow-down in domestic demand: Delaying investments, particularly construction Uncertainty about employment Slower wage growth and lower remittances Wealth effects (asset prices) Some already ripe for a home-grown crisis: Cushions differ among countries IMF has tried to stress differences in the region!

13 13 II.8 Vulnerabilities and Severity of Recessions Have Varied

14 14 II.9 Regional Economic Outlook

15 15 III.1 Coordinated Global Measures Avoid the mistakes of the 1930s: Avoid a liquidity crisis becoming a solvency crisis Avoid trade restrictions and capital controls Avoid excessive competing depreciations Coordinated policy actions (G20 statements): Central banks provide ample liquidity Governments allow stimulus subject to fiscal space Global coordination: The changing role of the IMF World Bank, EBRD, EIB, etc. The European Union (EU)

16 16 III.2 The Role of The IMF Mitigating the impact of the global crisis: Reform of IMF facilities: Adjust set of facilities: –Introduced Flexible Credit Line (FCL) –Enhanced Stand-By Arrangement (SBA) –Facilitated exceptional access and frontloading Streamlining conditionality: –Re-focus on macroeconomic stability –Reduce detailed structural conditionality Increase access to funding ($250 ->$750 bill) Increase SDR allocation Further encourage policy coordination: Surveillance (macroeconomic policies) Financial sector regulation (role of FSAP)

17 17 III.3 IMF Assistance Suddenly Needed

18 18 III.4 IMF Lending Activities

19 19 IV.1 Romania: A Case in Point Global crisis made it increasingly difficult to secure external financing: Large short-term private debt Large fiscal imbalances even in good years, make financing challenging during a recession => Emerging credibility problem! => In need of a safety belt ! !

20 20 IV.2 Romanias Package Joint package supporting Romanias program! Size of the safety belt (20 billion over 2 years) : IMF: May 4; 24-month Stand-By Arrangement with exceptional access 12.95 billion (1110.77% of quota). Interest rate about 3½% and repayment over 3–5 years. EU*: May 5; ECOFIN Council approved the framework for a 5 billion loan, a maximum of five installments over 24 months (on top of pre- and post-accession funds and the advance payment of structural funds in 2009). Interest rate is libor + spread and an average maturity of maximum 7 years. World Bank*: 2009–10, 3 DPLs of total 1 billion. Interest rate will depend on the maturity, currency, and if fixed or floating rate. EBRD and other multilateral IFIs (EIB): various projects, about 1 billion. * Also budget support

21 21 IV.2 Romanias Economic Program Foreign banks committed to maintain exposure: European Bank Coordination Initiative: exposure CAR of 10% Government addresses fiscal imbalances: Fiscal consolidation: ensure sustainability! Improve fiscal governance: ensure predictability! NBR continues to maintain sound banking system: Ensure prompt and early action Price stability remains primary objective of monetary policy

22 22 IV.3 Ensure Fiscal Sustainability Budget deficits: March adjustment 1.1% of GDP August adjustment 0.8 % of GDP March August 2009 -4.6% -7.3% 2010 -3% -5.9% 2011 better than-3% -4.3% Public salaries Vulnerable groups Arrears of general government Government guarantees Balance following factors: Back on a sustainable path Realistic financing Avoid excessive cuts exacerbating the recession

23 23 IV.4 Ensure Fiscal Predictability Tax administration Restructuring of public sector *Public compensation reform (unitary public pay law): Simplified pay scale, reduce reliance on bonuses More transparent Equity Save resources Better monitoring and control of public enterprises *Fiscal responsibility act: Multi-year budgets Independent fiscal council Local governments and self-financed units *Pension reform: Pensions related to contributions Broaden coverage Index to inflation instead of wages Increase gradually the retirement age * New legislation

24 24 IV.5 Market Reactions

25 25 V.1 Conclusion: IMF Global financial crisis is deep! Financial integration is significant! The IMF is mitigating the crisis by: Intensified coordination: member countries, other IFIs, EU, and banks Providing financing to smooth the adjustment: –Should not be an excuse to delay structural reforms! Functioning as an external anchor provided authorities are committed! Further encourage global policy coordination

26 26 V.2 Lessons: The Jury Is Still Out! Unsustainable imbalances must be addressed: No alternative to sound macroeconomic policies: Sustainable fiscal policies! Price stability with an eye on asset price inflation! G20 (IMF, WB, etc.): Improve global surveillance! Financial intermediation is a catalist: Legal and prudential framework must ensure: Sound incentives, and Adequate capital buffers! G20 (FSB & IMF), and EU: Revisit regulatory and supervisory framework!

27 27 Thank you very much for your attention

28 28 Principles for Policy Exits 1. The timing of exits should depend on the state of the economy and the financial system, and should err on the side of further supporting demand and financial repair. 2. With some exceptions, fiscal consolidation should be a top policy priority. Monetary policy can adjust more flexibly when normalization is needed. 3. Fiscal exit strategies should be transparent, comprehensive, and communicated clearly now, with the goal of lowering public debt to prudent levels within a clearly-specified timeframe. 4. Stronger primary balances should be the key driving force of fiscal adjustment, beginning with actions to ensure that crisis-related fiscal stimulus measures remain temporary. 5. Unconventional monetary policy does not necessarily have to be unwound before conventional monetary policy is tightened. 6. Economic conditions, the stability of financial markets, and market-based mechanisms should determine when and how financial policy support is removed. 7. Making exit policies consistent will improve outcomes for all countries. Coordination does not necessarily imply synchronization, but lack of policy coordination could create adverse spillovers." Source:

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