Central Banking in the Post Greece Crisis Period
Luc Riedweg GIC Conference, Prague Tuesday, June 14th, 2010
GIC Conference - Prague June 14th
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Outline

Latest actions of central banks and public authorities to contain the tensions on financial markets

The challenges ahead for the global financial system
Source : Bloomberg.
GIC Conference - Prague June 14th
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Outline

Latest actions of central banks and public authorities to contain the tensions on financial markets

The challenges ahead for the global financial system
Source : Bloomberg.
GIC Conference - Prague June 14th
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Sovereign debt tensions  
Bond spread for several euro area countries widened Even less vulnerable Banks countries were affected
Euro area 10Y interest rates during the four stages of the crisis 8%
Systemic outbreak
Financial crisis build-up
Systemic response
Sovereign risk
7%
Germany
France Italy
6%
Spain Netherlands
5%
Belgium Austria
4%
Greece Ireland
3%
Portugal Finland
2% 01/07
07/07
01/08
07/08
01/09
07/09
01/10 Source : Bloomberg.
GIC Conference - Prague June 14th
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Sovereign debt tensions CDS premia (bp)
Source: Bloomberg
Source : Bloomberg.
GIC Conference - Prague June 14th
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Spot libor-OIS has more than doubled since April 3-month Libor OIS spreads (bp) 60
en bps
50 40
30 20 10 0 07/09
10/09 01/10 04/10 months Spread EURIBOR - swap OIS 3 3mois Spread LIBOR USD - swap OIS 33mois months
Source: Bloomberg
Source : Bloomberg.
GIC Conference - Prague June 14th
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Public authorities’ response
Securities Market Programme (SMP)
European Financial Stabilisation Fund (EFSF)
ECB/Fed swap dollar facility
Source : Bloomberg.
GIC Conference - Prague June 14th
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The functioning of the market for government bond is central to the transmission of the ECB’s policy rates
Price channel
Liquidity channel
Balance sheet channel
Government bonds constitute the benchmark for pricing almost all loans to the private sector When risk premia become too large, the signal from the key policy rates is no longer perceivable and does not reach the real economy
Government bonds are often used as collateral for banks’ refinancing operations If government bond markets are disrupted, this hampers the functioning of the interbank market and reduces liquidity in this market
Lower government bond prices imply valuation losses in the assets held by the financial and non-financial sectors. For banks, the lower capital base may mean that they can supply fewer loans to the economy.
GIC Conference - Prague June 14th
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Outline

Latest actions of central banks and public authorities to contain the tensions on markets

The challenges ahead for the global financial system
Source : Bloomberg.
GIC Conference - Prague June 14th
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Fragile conditions in the EU banking sector
Increase in cost of risk
EUR bn
120
2008
2009
100
80
+46%
+ 40%
60
40
20
0
Europe
USA
Source : Financial reports
GIC Conference - Prague June 14th
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Fragile conditions in the EU banking sector Provisions for non performing loans / Non performing loans 2008
2009
100% 90% 80% 70% 60% 50% 40% 30%
GIC Conference - Prague June 14th
HSBC
RBS
Barclays
UBS
CS
DB
Santander
Source : Financial reports
SG
BNPP
20%
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Resurgence of interest rate risk Recent steepening of the yield curve
Upward pressure on interest rates: steepening of the 2Y-10Y spreads What are the main drivers for the upcoming months? 2Y-10Y spread – Bund
2Y-10Y spread – US Treasury 300bp
6%
250bp
5%
4%
200bp
4%
200bp
3%
150bp
3%
150bp
2%
100bp
2%
100bp
1%
50bp
1%
50bp
0%
0bp
0%
0bp
6% Spread 2Y-10Y 2Y 10Y
5%
01/07
07/07
01/08
07/08
01/09
07/09
01/10
01/07
300bp Spread 2Y-10Y 2Y 10Y
07/07
01/08
07/08
01/09
250bp
07/09
01/10 Source : Bloomberg.
GIC Conference - Prague June 14th
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Expected evolutions of the yield curve Three sources of risk
Macroeconomic environment
Improving growth likely to put pressure on returns…
…roughly cancelled out by the low inflation context
Imbalance between supply and demand
No structural imbalances anticipated between fixed income supply and demand
UK stands for an exception (end of quantitative easing)
Sovereign risk
Deterioration in the sovereign risk could potentially triggered sharp moves in long term rates
Increasing disparities within the Euro area and, more broadly, at the global level
GIC Conference - Prague June 14th
Low risk
Medium risk
Potentially high risk
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Expected evolutions of the yield curve Downward pressure stemming from low inflation
A possible impact on long term yields due to the improving macroeconomic environment…
…should roughly be cancelled out by the low inflation context Inflation – Consensus forecast end 2010 and 2011 5%
Consensus 4% 3% 2,6%
2%
2,29%
1,99%
1,22%
1%
1,51%
1,73%
0% 2010
2011
United States
2010
2011
Euro area
GIC Conference - Prague June 14th
2010
2011
United Kingdom
Source : Consensus Economics.
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Banks’ refinancing risk Average maturity and aggregate face amounts of Moody’s rated Euro Area debt issuance
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Realized and Expected Writedowns or Loss Provisions for Banks by Region
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Macroeconomic risks in the Global Financial Stability Map (IMF)
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Sovereign risks: transfer of risks to governements balance sheets
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Sovereign risks: increasing borrowing needs
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Sovereign risks & main contagion channels
Sovereign debt to GDP in the G7
Sovereign risks and spillover channels
Source : IMF GFSR
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