Recovering Under Stress
Manuel Balmaseda CEMEX Chief Economist Rome, April 2011
Slower than usual recovery
Percent of Deviation of GDP from Potential GDP
10 8 6
Range (max-min) during 10 previous recessions
4 2 0 -2
Average of previous 10 recessions
-4 -6 Current recession/recovery
-8 -10 -7
-6
-5
-4
-3
-2
-1
0
quarters Note: t=0 last quarter of recession Source: St. Louis Fed, BEA and CEMEX
1
2
3
4
5
6
7
Slower than usual recovery. Surprising?
Average % change in real GDP by recession driver
Average duration by recession driver (number of quarters) 8.0
5.0
3.0
Recovery
6.0
1.0 4.0
Recession Recovery
-1.0 2.0
-3.0
Recession 0.0
-5.0 All
Financial crisis
Financial crisis highly synchronized
All
Financial crisis
Recessions triggered by financial crisis tend to be deeper and recoveries are milder and slower Source: IMF
Financial crisis highly synchronized
Slower than usual recovery. Surprising? Cross Border Synchronization: Housing, Recessions & Banking Crisis (number of countries in a bust or recession as % of total) 100%
Housing price busts Recessions
80%
Systemic Banking Crisis
Hun
Non Systemic Banking Crisis
Nor Fin USA
60%
Swe
Nz
Pol
USA
40%
Mex
Spa
Mex
Czh
Tur
Jap
20%
Fra
Kor Tur
0% 1970
74
78
82
86
90
94
98
2002
Source: Cemex Economics, IMF and Claessens. Klingeibel and Laeven (2004)
Residential adjustments are particularly painful proccesses: excesses’ clean-up, perverse accounting and leads and lags between residential and other activities (banking sector, rest of construction, fiscal accounts,‌)
Crisis resolution policies may have prevented “depression” but limit recovery
Advanced economies
Adjustment of pre-crisis excesses (housing, private leverage, financial) Adjustment of excesses to cope with the crisis (fiscal, monetary)
Creative measures
“There ain’t no free lunch” Limiting growth dynamics (sub-par growth)
Adjustment of bubble excesses well on course Housing Starts (Thousands) US
Spain
2400
800 700
Equilibrium level
2000
Equilibrium level
600
1600 500
1200
400 300
800
200
400
100
0
Residential activity has suffered a very significant adjustment ... ... However, it will take time for excesses to be completely absorved Source: CEMEX
2015
201
209
206
203
20
197
194
19
198
1985
5 1 0 2
1 0 2
9 0 2
6 0 2
3 0 2
0 2
7 9 1
4 9 1
9 1
8 9 1
5 8 9 1
0
Adjustment of bubble excesses well on course US: Saving and Investment by sectors (% of GDP) 8% Private Gap (Private S-I)
5%
Statistical Discrepancy
2% -1% -4% -7%
CA
-10%
Fiscal Balance (CBO's forecast)
1 0 2
8 0 2
5 0 2
0 2
9 1
6 9 1
3 9 1
0 9 1
7 8 9 1
4 8 9 1
8 9 1
8 7 9 1
5 7 9 1
-13%
Private deleveraging replaced by public leveraging. Solving an excesive debt problem with debt? Source: BEA and CEMEX
In the solution (whether necessary or not) lies the problem. Excesive deficit to prevent the “depresion” …
… have given rise to debt sustainability concerns.
Fiscal deficit (% GDP) 12 2010
2011
General Government Public Debt (% GDP)
120
US
110
10
100
8
France
90
Spa
80
6
UK
70
Germany
60
4
50 40
2
30
2015
2014
2013
201
201
US
201
UK
209
Spain
208
Portugal France
207
Germany Italy
206
20
0
Deficit consolidation required in most countries.
Source: IMF. Fiscal Monitor update (January 2011)
8
Monetary excesses will also need to be withdrawn eventually ECB has also expanded its balanceECB´s balance sheet has also expanded (M$) sheet
Fed’s balance sheet expanded (QE2) 2400000
2750000
2350000
Off balance sheet securities lent to dealers
2000000
Total Claims 1600000
1950000
1550000
Gold and other assets
Other assets
1200000
Other Bank credit Other securities
1150000
750000
800000
Lending to Credit institutions
400000 US Treasuries
350000
Securities
-0 7 -0 8 -0 8 -0 8 -0 8 -0 8 -0 8 -0 9 -0 9 -0 9 -0 9 -0 9 -0 9 -1 0 -1 0 -1 0 -1 0 -1 0 -1 0 -1 1 -1 1 N v o n a J r a M y a M l u J p e S v o N n a J r a M y a M l u J p e S v o N n a J r a M y a M l u J p e S v o N n a J r a M
vN -0 o 7 Jan -0 8 ar -0 M 8 ay -0 M 8 l -0 Ju 8 Sep -0 8 v -0 o N 8 Jan -0 9 ar -0 M 9 ay -0 M 9 l -0 Ju 9 Sep -0 9 v -0 o N 9 Jan -1 0 ar -1 M 0 ay -1 M 0 l -1 Ju 0 Sep -1 0 v -1 o N 0 Jan -1 1 ar -1 M 1
0
Difficult to differentiate between monetary and fiscal policy.
Source: Federal Reserve and ECB
9
Monetary excesses will also need to be withdrawn eventually ECB interventions (Million â‚Ź) and sovereign spread (bp)
ECB Lending to Euro-Banks (% total assets) 700
3000 Ireland 10 year spread
600
2500 Portugal 10 year spread
500
2000
400 1500 300 Spain 10 year spread
1000
200 100
ECB Security Market Program (right)
ar -1 M 1
Feb -1 1
Jan -1 1
ec -1 D 0
v -1 o N 0
ct -1 O 0
Sep -1 0
g -1 u A 0
l -1 Ju 0
0
n -1 Ju 0
0
500
Difficult to differentiate between monetary and fiscal policy.
Source: IIF
Source: ECB and CEMEX
10
Fiscal and banking excesses are two sides of the same coin, particularly in Europe
Europe. 5 year CDS (bp) by countries 1000
240
Gre
Europe. 5 year CDS (bp) by sectors
220 Sovereign
200 800
180
600
Ire
400
Por Spa
200
Ita Ger
0
160 140
Financial
120 100 80
Corporate
60
Source: Bloomberg
-09 -09 -09 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -11 -11 -11 -11 ctO v o N ec D Jan Feb ar M p A r ay M Ju n l Ju g u A Sep ct O v o N ec D Jan Feb ar M p A r
pr -11 A
Jan -11
ct -10 O
Jul -10
pr -10 A
Jan -10
ct -09 O
Jul -09
pr -09 A
Jan -09
ct -08 O
Jul -08
pr -08 A
Jan -08
40
Source: Markit Itraxx Indices
11
High exposure of core Europe’s banking sector to sovereign debt and banking sector of the periphery
Exposure of German and French Banks to peripheral countries is significant… 800
25%
…and, particular, to Spanish banks 250 Private
POR 700
Public SP
GR IRE
600
Banks
20%
200
SP
IR
SP
IR
IT 500
15%
150 SP
400
% total foreign claims (dcha.)
300
10%
100 GR POR
GR
200 5%
50
0%
0
IR
POR
GR POR
100 0 GER
FR
UK
JP
US
Foreign claims of European Banks vis a vis peripheral countries at end of June 2010. Amounts outstanding. In billions of US$ and % of total foreign claims.
Source: BIS
GER
FR
UK
Foreign claims of European Banks vis a vis peripheral countries by sector at end of March 2010. In billions of US$.
US Banks’ balance sheet are not fully repaired either.
Estimated total commercial real estate debt maturity schedules in the US (B$)
Still fragile banking systems* 400
500
2009-10 loan extensions Debt maturity
350
400
300 250
300
Extended until 2011-13
Europe
200
200
150 100 US
100
50
0
* Asset-weighted average of 5-year CDS spreads on senior Debt. Source: Bloomberg
J -1 an 1 r -1 p A 1
ct -1 O 0
J -1 an 0 r -1 p A 0 l -1 Ju 0
ct -0 O 9
J -0 an 9 r -0 p A 9 l -0 Ju 9
ct -0 O 8
J -0 an 8 r -0 p A 8 l -0 Ju 8
ct -0 O 7
J -0 an 7 r -0 p A 7 l -0 Ju 7
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: BIS
Collateral effects on banking sector and emerging markets
Advanced economies
Adjustment of pre-crisis excesses (housing, private leverage, financial) Adjustment of excesses to cope with the crisis (fiscal, monetary)
Creative measures
No macro-imbalances
Emerging economies
Improved fundamentals China strenght (support for commodity prices)
Large capital inflows to EMs
Pressures on exchange rates, inflation, assets..
Abundant liquidity Public support 14
Recovering Under Stress
Manuel Balmaseda CEMEX Chief Economist Rome, April 2011