Download - Balmaseda GIC April 0711
Recovering Under Stress
Manuel BalmasedaCEMEX Chief Economist
Rome, April 2011
Slower than usual recovery
-10
-8
-6
-4
-2
0
2
4
6
8
10
-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7
Percent of Deviation of GDP from Potential GDP
Range (max-min) during 10 previous recessions
Average of previous 10 recessions
Current recession/recovery
quarters
Note: t=0 last quarter of recession
Source: St. Louis Fed, BEA and CEMEX
Slower than usual recovery. Surprising?
Source: IMF
0.0
2.0
4.0
6.0
8.0
All Financial crisis Financial crisis highlysynchronized
Recession
Recovery
-5.0
-3.0
-1.0
1.0
3.0
5.0
All Financial crisis Financial crisis highlysynchronized
Recession
Recovery
Average % change in real GDP by recession driver
Average duration by recession driver
(number of quarters)
Recessions triggered by financial crisis tend to be deeper and recoveries are milder and slower
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,…)
Cross Border Synchronization: Housing, Recessions & Banking Crisis
(number of countries in a bust or recession as % of total)
20%
40%
60%
80%
100%
0%1970 74 78 82 86 90 94 98 2002
USA
Spa
USA
Nor
Fin
Swe
Pol
Jap
KorFra
Czh
Hun
Nz
MexMex
Tur
Tur
Housing price busts
Recessions
Systemic Banking Crisis
Non Systemic Banking Crisis
Source: Cemex Economics, IMF and Claessens. Klingeibel and Laeven (2004)
Slower than usual recovery. Surprising?
Advanced economies
Adjustment of pre-crisis excesses (housing, private leverage, financial)
Adjustment of excesses to cope with the crisis (fiscal, monetary)
Creative measures
Limiting growth dynamics (sub-par growth)
“There ain’t no free lunch”
Crisis resolution policies may have prevented “depression” but limit recovery
US Spain
Adjustment of bubble excesses well on course
Source: CEMEX
0
400
800
1200
1600
2000
2400
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
Equilibrium level
0
100
200
300
400
500
600
700
800
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
Equilibrium levelEquilibrium level
Housing Starts (Thousands)
Residential activity has suffered a very significant adjustment ...
... However, it will take time for excesses to be completely absorved
US: Saving and Investment by sectors (% of GDP)
-13%
-10%
-7%
-4%
-1%
2%
5%
8%
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
Fiscal Balance (CBO's forecast)
Private Gap (Private S-I)
Statistical Discrepancy
CA
Source: BEA and CEMEX
Adjustment of bubble excesses well on course
Private deleveraging replaced by public leveraging. Solving an excesive debt problem with debt?
8
In the solution (whether necessary or not) lies the problem.
Source: IMF. Fiscal Monitor update (January 2011)
0
2
4
6
8
10
12
Germany Italy Portugal France Spain UK US
2010 2011
Excesive deficit to prevent the “depresion” …
Fiscal deficit (% GDP)
20
30
40
50
60
70
80
90
100
110
120
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
USFrance
GermanyUKSpa
… have given rise to debt sustainability concerns.
General Government Public Debt (% GDP)
Deficit consolidation required in most countries.
9
Monetary excesses will also need to be withdrawn eventually
Source: Federal Reserve and ECB
0
400000
800000
1200000
1600000
2000000
2400000
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09M
ar-0
9
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan-
10M
ar-1
0
May
-10
Jul-1
0
Sep
-10
Nov
-10
Jan-
11M
ar-1
1
ECB́ s balance sheet has also expanded (M$)
Securities
Lending to Credit institutions
Total Claims
Gold and other assets
350000
750000
1150000
1550000
1950000
2350000
2750000
Nov-
07Ja
n-08
Mar
-08
May
-08
Jul-0
8Se
p-08
Nov-
08Ja
n-09
Mar
-09
May
-09
Jul-0
9Se
p-09
Nov-
09Ja
n-10
Mar
-10
May
-10
Jul-1
0Se
p-10
Nov-
10Ja
n-11
Mar
-11
US Treasuries
Other Bank credit
Off balance sheet securities lent to dealers
Other assets
Other securities
Fed’s balance sheet expanded (QE2)
Difficult to differentiate between monetary and fiscal policy.
ECB has also expanded its balance-sheet
10Source: IIF Source: ECB and CEMEX
0
500
1000
1500
2000
2500
3000
0
100
200
300
400
500
600
700
Jun-
10
Jul-1
0
Aug-
10
Sep-
10
Oct
-10
Nov-
10
Dec-
10
Jan-
11
Feb-
11
Mar
-11
ECB Security Market Program (right)
Spain 10 year spread
Ireland 10 year spread
Portugal 10 year spread
ECB interventions (Million €) and sovereign spread (bp)
Monetary excesses will also need to be withdrawn eventually
ECB Lending to Euro-Banks(% total assets)
Difficult to differentiate between monetary and fiscal policy.
11
Fiscal and banking excesses are two sides of the same coin, particularly in Europe
40
60
80
100
120
140
160
180
200
220
240
Oct
-09
Nov-
09De
c-09
Jan-
10Fe
b-10
Mar
-10
Apr-
10M
ay-1
0Ju
n-10
Jul-1
0
Aug-
10Se
p-10
Oct
-10
Nov-
10De
c-10
Jan-
11Fe
b-11
Mar
-11
Apr-
11
Financial
Corporate
Sovereign
Europe. 5 year CDS (bp) by sectors
Source: Markit Itraxx Indices
0
200
400
600
800
1000
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
Oct
-10
Jan-
11
Apr-
11
Ger
Por
Spa
Gre
Ire
Ita
Source: Bloomberg
Europe. 5 year CDS (bp) by countries
High exposure of core Europe’s banking sector to sovereign debt and banking sector of the periphery
…and, particular, to Spanish banks
Exposure of German and French Banks to peripheral countries is
significant…
Source: BIS
0
100
200
300
400
500
600
700
800
GER FR UK JP US0%
5%
10%
15%
20%
25%
POR
GR
IRE
SP
IT
Foreign claims of European Banks vis a vis peripheralcountries at end of June 2010. Amounts outstanding. Inbillions of US$ and % of total foreign claims.
Foreign claims of European Banks vis a vis peripheralcountries by sector at end of March 2010. In billions ofUS$.
0
50
100
150
200
250
GER FR UK
Private Banks Public
GR
IR
POR
SP
GR
GRIR
IR
PORPOR
SP
SP
% total foreign claims (dcha.)
US Banks’ balance sheet are not fully repaired either.
Estimated total commercial real estate debt maturity schedules
in the US (B$)
Source: BIS
0
100
200
300
400
500
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2009-10 loan extensionsDebt maturity
Extended until 2011-13
0
50
100
150
200
250
300
350
400
Jan-
07
Apr-
07
Jul-0
7
Oct
-07
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
Oct
-10
Jan-
11
Apr-
11US
Europe
* Asset-weighted average of 5-year CDS spreads on senior Debt.
Source: Bloomberg
Still fragile banking systems*
14
Advanced economies
Adjustment of pre-crisis excesses (housing, private leverage, financial)
Adjustment of excesses to cope with the crisis (fiscal, monetary)
Creative measures
Collateral effects on banking sector and emerging markets
Emerging economies
No macro-imbalances
Improved fundamentals
China strenght (support for commodity prices)
Pressures on exchange rates, inflation, assets..
Large capital inflows to EMsAbunda
nt liquidity
Public support
Recovering Under Stress
Manuel BalmasedaCEMEX Chief Economist
Rome, April 2011