MANAGING THE FINANCIAL CRISIS

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Presentation transcript:

MANAGING THE FINANCIAL CRISIS Presentation by John Verrinder Eurostat Unit C3

A financial and economic crisis Summer 2007 – strains in financial markets Tightening of money markets Downgrading of ratings of some assets Summer 2008 – banking and market crisis Money markets almost closed ; bank lending falls Declines in equity markets Cases in UK and Germany, then Fortis, Dexia… Autumn 2008 – real economy Declines in industrial production and GDP Rising unemployment Falling consumer price indices Falling Euro

Short term interest rates (3 months) Source: Eurostat (irt_st_m), ECB

Long term interest rates (annual rate %) Source: ECB

Bank lending – Euro area Source: Eurostat (sector accounts)

Euro exchange rate Source: Eurostat (ert_bil_eur_m), ECB

Government responses to the financial crisis One-off rescue operations Systematic interventions Recapitalisation (quoted equity, preference shares, etc) Lending Guarantees (on deposits, bank borrowing, bank assets) Purchase of assets (+ bad banks) Central Bank operations Cuts in interest rates Exchange of assets Purchase of assets

Impacts on government finances Mainly on government debt (raising funds for recapitalisation, lending, asset purchase) Possibly on deficit in some circumstances Government pays too much for shares or other assets Debt cancellation and assumption Guarantee fees and calls Eurostat guidance awaited - consistency Central Bank is not part of “government” so its operations are separate

Impacts of loans and guarantees

The real economy – Monthly EU27 Manufacturing production (volume) Source: Eurostat (seasonally adjusted)

The real economy - Quarterly EU27 GDP Source: Eurostat (Seasonally and working day adjusted)

The real economy - Unemployment rate Source: Eurostat (seasonally adjusted)

Government interventions to support the “real economy” Fiscal approach Agreements on fiscal stimulus Expenditure side (bring forward projects, social benefits..) Revenue side (tax cuts..) Rescue operations for non-financial corporations Support to small businesses Loans Guarantees Administrative changes (e.g VAT) Etc …