1. 1 The Impact of The Global Crisis on Central and Eastern Europe by Tonny Lybek IMF’s Resident Representative in Bulgaria and Romania tlybek@imf.org at Romanian Financial and Banking Analyst Association Bucharest December 8, 2009

2. 2 Agenda  I: World Economic Outlook –Uneven signs of recovery but no time for complacency  II: Regional Economic Outlook –From excessive credit growth to a credit crunch  III: Global Measures: Role of The IMF  IV: European Bank Coordination Initiative –Romania’s Economic Program  V: Conclusion

3. 3 I.1 The Global Crisis  Deepest global recession since the 1930’s:  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: Lehman’s Bankruptcy  -> Global uncertainty and downturn  March 2009: Downturn looses speed  -> Global measures, but uneven recovery

4. 4 I.2 How Long Will It Last?  Financial shocks:  Financial shocks typically lasts longer!  Global integration larger than most realized!  No obvious locomotive:  Unemployment is lagging!  Non-performing loans (NPLs) are lagging!  Normalization of activity? Re-stocking!  Positive signs, but no time for complacency!  Cautious exit of anti-crisis programs (G20 on Nov 6–7): http://www.imf.org/external/np/g20/110709.htm

5. 5 I.3 World Economic Outlook

6. 6 II.1 Central and Eastern Europe  The Good Times 2003–07—Catching-up:  Vulnerabilities were building-up!  Private sector imbalances growing rapidly! –Increasing current account deficits –Increasing exposures to Western banks  Public finances looked much better than they were!  Convergence process not fully appreciated!  Crisis came late to the region:  Initial denial made it difficult to take early action! The five stages: Denial -> Resentment -> Bargaining -> Depression -> Acceptance!

7. 7 II.2 Current Account Deficits Increased

8. 8 II.3 Current Account Deficits Fueled by Capital Inflows

9. 9 II.4 Increasing Exposure to Western Banks

10. 10 II.5 The Credit Boom Was Fueled by Western European Banks

11. 11 II.6 Exposures During Previous Crises: Lessons To Be Learned?

12. 12 II.7 Much of The Lending in FX

13. 13 II.8 Impact of The Global Crisis  Shock I: Lower external demand  Shock II: Slowdown in capital inflows:  Foreign direct investment (FDI)  Funding of—mainly foreign-owned—banks!  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) => From excessive credit growth to a credit crunch!  Some already ripe for a home-grown crisis:  Imbalances differed among CEE countries  Cushions differed among countries => IMF has tried to stress differences in the region!

14. 14 II.9 Vulnerabilities and Severity of Recessions Have Varied

15. 15 II.10 Regional Economic Outlook

16. 16 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)

17. 17 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)

18. 18 III.3 IMF Assistance Suddenly Needed

19. 19 III.4 IMF Lending Activities

20. 20 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” ! !

21. 21 IV.2 Romania’s Package  Joint package supporting Romania’s 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. * Half of second tranche to help finance the budget deficit ** Budget support

22. 22 IV.3 Romania’s Economic Program  A: “European Bank Coordination Initiative”: foreign- owned banks remain committed to Romania!  B: Government addresses fiscal imbalances:  Fiscal consolidation: ensure sustainability!  Improve fiscal governance: ensure predictability!  C: NBR continues to maintain sound banking system:  Ensure prompt and early action  D: Price stability remains primary objective of monetary policy (inflation-targeting)

23. 23 IV.4 European Bank Coordination Initiative  For instance, part of programs in: Romania, Hungary, Serbia, Bosnia & Herzegovina  Romania: Nine largest foreign-owned banks committed to:  (i) maintain exposure to Romania, and  (ii) increase capital (CAR 8% -> 10) in line with stress tests during the program period : –Vienna meeting on March 26, 2009 –Brussels meeting on May 19, 2009 –Bucharest meeting on August 6, 2009 –Brussels meeting on November 18, 2009

24. 24 IV.5 Market Reactions

25. 25 V Conclusion  Global financial crisis is deep!  Financial integration is significant!  Positive signs, but not time for complacency!  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!

26. 26 Thank you very much for your attention