imf euro presentation april2012

7/31/2019 IMF Euro Presentation April2012

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1995 or the earliest date

Convergence


3/37

2005

Convergence


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2008

Convergence


5/37

2010

Convergence


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2000 2002 2004 2006 2008 2010 2012 2014 2016

0

30

60

90

120

150

180Euro area maximum

Euro area minimum

General Government Gross Debt(Percent of GDP)

Projections

Debt


7/37

2000 2002 2004 2006 2008 2010 2012 2014 2016

0

30

60

90

120

150

180Euro area maximum

Euro area minimum

General Government Gross Debt(Percent of GDP)

Projections

Debt


8/37

-15

-10

-5

0

5

10

15

20

-50 -40 -30 -20 -10 0 10 20 30 40ChangeinREER-ULCr

elativetoe

uroarea(1999-20

10)

Export growth over euro area (1999-2010)

Depre

ciatio

n

More

export

s

App

reciati

on

Lessexpo

rts

Competitiveness

Relative Exchange Rate and Export Performance-20

-15

-10

-5

5

10

15

0


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-15

-10

-5

0

5

10

15

20

-50 -40 -30 -20 -10 0 10 20 30 40ChangeinREER-ULCr

elativetoe

uroarea(1999-20

10)

Export growth over euro area (1999-2010)

Depre

ciatio

n

More

export

s

Appre

ciatio

n

Lessexp

orts

Competitiveness

Relative Exchange Rate and Export Performance-20

-15

-10

-5

5

10

15

0


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GREECE


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In Greece, debt and deficits climbed to precipitous levels.The massive spending increases behind this drove up wages and prices, badly

undermining competitiveness, and setting the stage for the crisis.

0

30

60

90

120

150

-15

-10

-5

0

5

10

15

20

25

1990 1996 2002 2008

Gen. Gov. Fiscal Balances(percent of GDP)

Primary balance (lhs)

Gross debt (rhs)

35

40

45

50

2000 2003 2006 2009

Revenue & Primary Spending(percent of GDP)

Revenue

Prim. Exp.


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1. Design of the SBA


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Fiscal adjustment was expected to boost market confidenceand restore financing

50

100

150

200

250

300

0

10

20

30

40

50

60

70

80

2010 2011 2012 2013 2014 2015

Finance(basis points)

Market borrowing

Spreads aboveGerman bund

0

20

40

60

80

100

120

140

160

-15

-10

-5

0

5

10

2006 2009 2012 2015

Fiscal Balances(percent of GDP)

Fiscal deficit

Debt

Program


14/37

Structural reforms were designed to improvecompetitiveness and trigger an export-led recovery.

(which would help reduce the impact of fiscal adjustment).

-10

-5

0

5

10

-10

-5

0

5

10

2006 2009 2012 2015

Contributions to GDP(percent)

Net exports

Domestic demand

Program

0

1

2

3

4

5

0

1

2

3

4

5

2006 2009 2012 2015

GDP deflator(percent change)

2009-AIV

SBA

Program


15/37

2. SBA IMPLEMENTATIONExperience and outcomes


16/37

Competitiveness problems have proven less tractable, and therecession has proven deeper than expected.

-1

0

1

2

3

4

5

6

2006 2008 2010

GDP Deflator(average, in percent)

SBA Request 5th Review

Program

-8

-6

-4

-2

0

2

4

6

2006 2009

GDP Growth(in percent)

SBA Request 5th Review

ProgramDatarevisions

Datarevisions


17/37

Significant fiscal adjustment, but soaring debt and spreads

-12

-8

-4

0

4

8

2009 2011 2013 2015

Primary Deficit(percent of GDP)

SBA Request

5th Review

Program

0

10

20

30

40

50

Dec'07 Dec'08 Dec'09 Dec'10 Dec'11

GGB Spreads over Bunds(percent)

2-Year

10-Year

Program

100

120

140

160

180

200

2009 2010 2011 2012 2013 2014 2015

Gross Public Debt(percent of GDP)

SBA

5th review

Program


18/37

3. The new EFF programPolicy Adaptation


19/37

The new program places emphasis on directly securing fastercompetitiveness improvements to bring forward the recovery

90

100

110

120

130

90

100

110

120

130

2000 2004 2008 2012

ULC(Index, 2000=100)

ULC (EFF)

ULC- Euro area

NewProgram

-2

0

2

4

6

-2

0

2

4

6

2005 2008 2011 2014

GDP deflator(percent change)

SBA

EFF

Euro area

NewProgram


20/37


21/37

Fiscal adjustment has been slowed down and debt relief hasplaced public debt on a better (but still risky) trajectory

100

120

140

160

180

200

100

120

140

160

180

200

2007 2011 2015 2019

Debt

(percent of GDP)

SBA-5th review

EFF baseline

EFF alternativescenario

-15

-10

-5

0

5

10

-15

-10

-5

0

5

10

2009 2012 2015

Primary fiscal deficit(percent of GDP)

SBA request

EFF baseline

SBA-5th review


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Portugal


23/37

Problem 1: Unsustainable fiscal policies

30

32

34

36

38

40

42

44

46

48

50

In percent of GDP

In percent of potential GDP

Primary Government Spending(ratio to GDP)

0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

160

General Government Debt, 2010

(ratio to GDP)


24/37

Problem 2: High corporate, household andfinancial sector indebtedness

0

20

40

60

80

100

120

140

160

180

Greece

Italy

EA

Spain

Portugal

Non-Financial Corporate Debt to GDP, 2010(Percent)

0

20

40

60

80

100

120

140

160

180

Greece

Italy

EA

Spain

Portugal

Household Debt to GDP, 2010(Percent)


25/37

Problem 3: Loss of competitiveness, resulting inlow-growth and a high current account deficit

-4

-2

0

2

4

6

Wages

Productivity 1/

ULC

Unit Labor Cost Change (TotalEconomy), 2001-08(percent change)

-4

-2

0

2

4

6

Wages

Productivity 1/

ULC

Unit Labor Cost Change(Manufacturing), 2000-08(percent change)

1/ Negative = increase in labor productivity.


26/37

Pillar 1: Fiscal Solvency

-8

-6

-4

-2

0

2

4

6Primary Balance (percent of GDP)

Primary Structural Balance (percent ofpotential GDP)

GRC(2010)

IRL(2009)

PRT(2011)

0

5

10

15

20

25

0 5 10 15

Adjustmentover5years

Adjustment over 2 years

Magnitude and Timing of Fiscal Adjustment in Euro Area(change in structural primary balance as percent of GDP)1

Back Loaded

1 Since structural adjustment started -- between 2009 and 2012depending on the country (2011 for Portugal).

Front Loaded


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Pillar 2: Enhancing Growth andCompetitiveness

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5 OECD Employment Protection Index,2008

Source: OECD. 2009 data for Portugal and France.

-3

-2

-1

0

1

2

3

4

5

6

7

Labor Cost Index2008 =100, y/y % change

Annual average


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29/37

11-months into the program, some encouragingsigns

Greece

Ireland

PortugalSpain

Italy

EA

-14

-12

-10

-8

-6

-4

-2

0-4 -2 0 2 4 6 8

C

ummulativeChangeinOutput

(inpercent)

Change in Current Account Balance(percentage points of GDP)

Output Loss and External Adjustment,2007-2011

-7.3

-4.2

1.2 0.7

0.60.4

-0.8

-0.5

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

In bns of euros In percent of GDP

Transfers, balance

Income, balanceImportsExportsCurrent account

Change in the current account: 2011-2010


30/37

So far so good, but significant challenges ahead

60

70

80

90

100

110

120

130

140

Alternative Scenarios(percent of GDP)

Deeper recession (2012-14)

Potential growth at 1 percent

Extreme scenario: potential growth at 1percent (nominal primary expenditureunchanged compared to baseline)

60

70

80

90

100

110

120

130

140

Program Request

Third Review

Public Debt(percent of GDP)


31/37


32/37

Pre-Program Policy Response was Substantialbut

Bank Funding Runs Force Program in late 2010

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

Aug-10 Oct-10 Dec-10

Debt securities, net repayment

Deposits, private sector (net outflows)

ECB liquidity support

Bank Funding Outflows(Euro billions)

55.7

40.2

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

2008 2009 2010 2011

Bank support costs

Deficits and other debt

Government Debt, Net(Percent of GDP)

High Private Debts Increase the Risk


33/37

High Private Debts Increase the Riskof a Pernicious Downward Cycle

Real economyweak output/incomegrowth

Fiscalhigher deficit &

further tightening

HH deleveraging leads to higher saving

and weak demand

Lower HH DI raises debt DI ratio

Bankshigher loan losses

Property markethouse price declines

fiscal tightening

reduces DI

HouseholdsHigh debt to DI ratio

Banks restrict lending

Further weakens

HH balance sheet

Banks restrict

lending

Lower collateral values

DI= disposable income

HH = households


34/37

Bank RecapitalizationCredible, Cost Mitigated

0

10

20

30

40

50

Losses and

Capital Needs

Existing

Capital

Capital

Injection

Required

Capital

Sources

Recapitalization (Billions of euros)

Loan LossForecast

(Blackrock)

Capital

for 6%Core Tier 1end 2013

Buffer for post

2013 losses

ExistingCapital

and

Provisions

Additional Capital

for Adverse Stress

Test Scenario

Deleveraging

Losses

Government16.5 billion

LMEs on Sub-debt

PrivateInvestments1 billion

Total 24 billion

Buffer5.3 billiono/w CoCo3 billion

- = =


35/37

DeleveragingPhased, mostly Offshore Assets

100

110

120130

140

150

160

170

180

190

0

50

100

150

200

250

300

End 2010 2011 2012 2013 End 2013

Disposals

Net amortization

Impairments and other

Deleveraging, 2011-2013

Core

Assets

Non-core

Assets

Core

Assets

Non-core

(Euro billions) (Loan/Deposit %)

Loan to

Deposit Ratio

122.5%

180%


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imf euro presentation april2012

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