Articles choisis, décembre 2013 1. NORMALISATION FINANCIÈRE Bloomberg - Fed ponders how to temper tapering without rate increase ................................2 2. STABILITÉ FINANCIÈRE Agefi - BNS, Généalogie des taux bas.........................................................................................7 Le Temps - Höfert, Les très importantes questions posées au quantitative easing...................9 McKinsey - QE and ultra-low interest rates : distributional effects and risks ..........................12 ECB - Financial stability review 11.2013 ...................................................................................17 Syndicate - Roubini, Back to housing bubbles .........................................................................27 3. VARIABLES DE NORMALISATION Bloomberg - Fed reveals new concerns about long-term US slowdown .................................31 FT - S&P downgrades Netherlands' credit rating .....................................................................36 1. NORMALISATION FINANCIÈRE Bloomberg - Fed ponders how to temper tapering without rate increase Fed Ponders How to Temper Tapering Without Rate Increase By Caroline Salas Gage - Nov 18, 2013 One of Janet Y ellen’s first challenges as Federal Reserve chairman will be figuring out how to cushion against a lurch in interest rates when she pares the pace of the central bank’s bond buying. After sending 10-year Treasury yields more than a percentage point higher by fueling taper expectations in May and June, policy makers now are grappling with their options when they do reduce debt purchases that have swelled their balance sheet to a record $3.91 trillion. The Fed’s failure so far to convince investors that tapering on its own doesn’t constitute a tightening of policy creates the risk of more market volatility as the central bank communicates about tools it’s never used. Related News: Y ellen Nomination to Get Vote This Week Banks That Adapt to New Rules Will Fare Best “Now, this is challenging: We’re in unprecedented circumstances, we’re using policies that have never really been tried before -- and multiple policies -- and we’re trying to explain to the public how we intend to conduct these policies,” Y ellen, the nominee to replace Ben S. Bernanke, told the Senate Banking Committee Nov. 14 at her confirmation hearing in Washington. “So, it is a work in progress, and sometimes miscommunication is possible.” Since lowering their benchmark interest rate to near zero in December 2008, Fed officials have relied on bond buying and forward guidance about their plans to try to spur growth. They’ve suggested pushing back the timeline for rate increases, emphasizing they won’t raise borrowing costs until inflation climbs, or lowering the interest they pay on the cash that banks park at the central bank as ways to add stimulus. New Experience “It’s been a struggle,” said Ward McCarthy, chief financial economist at Jefferies LLC in New Y ork. “With the shift to balance-sheet policy, there’s not a whole lot to fall back on -- both in terms of making decisions on how to conduct balance-sheet policy and how to communicate it. It’s a new experience both in and out of the Fed.” Y ellen, who is currently vice chairman, told the senators that central bankers “certainly want to diminish any unnecessary volatility” and are “trying as hard as we can to communicate clearly.” The Fed is buying $85 billion of mortgage-backed securities and Treasuries each month. It will slow these purchases in March, according to the median estimate of 32 economists in a Bloomberg News survey conducted Nov. 8. McCarthy predicts the Fed will try to push back expectations for an interest-rate increase to 2016 -though he’s not sure how. He also said the Fed may cut purchases of short-term debt and maintain the pace of buying longer-term securities in an effort to anchor borrowing costs. Surprised Investors The policy-setting Federal Open Market Committee’s Sept. 18 decision not to taper surprised investors across the globe after Bernanke outlined in May and June a possible timetable for reducing quantitative easing. On June 19, he said he might trim the pace of securities purchases this year and halt them by mid2014. His comments sent yields on the benchmark 10-year Treasury note as high as 2.99 percent on Sept. 5 from 1.93 percent on May 21. Bernanke cited the rise as one reason why the Fed chose to maintain the pace of its stimulus in September. Y ields since then have fallen to 2.67 percent at 4:59 p.m. yesterday in New Y ork as traders pushed back expectations for a taper, Bloomberg Bond Trader data show. Fed officials have been “a little bit naive about the way the bond market responds to the exit” of their record accommodation, said Ethan Harris, co-head of global economics research at Bank of America Corp. in New Y ork. “The Fed kept on insisting that tapering was a small move, but it’s not small symbolically.” Extend Outlook Harris, one of the few economists to correctly predict the Fed wouldn’t taper in September, said he expects the central bank to extend its outlook for raising rates, in part because inflation is falling short of its 2 percent goal. Prices are accelerating at a 0.9 percent annual rate, the personalconsumption-expenditures price index showed in September. “Inflation is too low,” though “it wouldn’t mean they don’t taper as they’re much more comfortable with forward guidance and interest rates than they are with the ever-expanding balance sheet,” Harris said. The FOMC has pledged to keep its benchmark rate near zero so long as the jobless rate remains above 6.5 percent and the outlook for inflation doesn’t rise above 2.5 percent. William English, an economist for the Fed Board of Governors, wrote in a paper this month that the strategy of linking higher rates to the unemployment peg has provided effective stimulus, and an even-lower threshold could be helpful. Joblessness was 7.3 percent in October. Adjust Guidance James Bullard, president of the Federal Reserve Bank of St. Louis, said in a Sept. 20 interview in New Y ork that introducing an inflation floor is a “more likely” way for policy makers to adjust their forward guidance than lowering the unemployment threshold. The price-acceleration floor would be something like: “so long as inflation was running below 1.5 percent,” the Fed wouldn’t raise interest rates, Bullard said. U.S. central bankers probably will cut their monthly quantitative easing in January by $10 billion and will extend the outlook for an increase in interest rates at a later point because it would be “too confusing to markets” to do both at the same time, Harris said. Asset purchases and communications about the path of policy rates are “discrete tools that can be deployed independently or in varying combinations,” Atlanta Fed President Dennis Lockhart said Nov. 12 in a speech in Montgomery, Alabama. “They can be thought of as a particular policy-tool mix chosen to fit the circumstances at this particular phase of the recovery,” and “going forward, it may be appropriate to adjust” the mix. Market Rout Some investors still are convinced there could be another market rout once the Fed reduces its bond buying. “It probably won’t be any different when the Fed ultimately is forced to taper: What you saw in May and June of this year was simply the dress rehearsal for the main event,” said Tad Rivelle, chief investment officer for fixed income in Los Angeles at TCW Group Inc. “This is a period where you start to skinny down and shrink your risk exposure.” Cutting the 0.25 percent rate the Fed pays on bank reserves would help reinforce the Fed’s message that it intends to keep monetary policy easy even as it starts to reduce its asset purchases, said Carl Lantz, head of interest-rate strategy in New Y ork at Credit Suisse Group AG. A coupling of the moves -- which could come in the first quarter of 2014 -- would help contain upward pressure on bond yields resulting from a pullback in quantitative easing, he said. Minneapolis Fed President Narayana Kocherlakota backed a lower rate in a Nov. 12 speech in St. Paul, Minnesota, saying it would provide more monetary stimulus to the economy. Y ellen is committed to promoting strong growth and won’t remove stimulus too soon, even as the Fed’s bond buying comes to a close, she said Nov. 14. “The message we want to send is that we will do what is in our power to assure a robust recovery in the context of price stability.” To contact the reporter on this story: Caroline Salas Gage in New Y ork at [email protected] To contact the editor responsible for this story: Chris Wellisz at [email protected] ®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED. 2. STABILITÉ FINANCIÈRE Agefi - BNS, Généalogie des taux bas 2. STABILITÉ FINANCIÈRE Le Temps - Höfert, Les très importantes questions posées au QE Les très importantes questions posées au quantitative easing mardi, 19.11.2013 Le QE pourrait aboutir à une situation paradoxale. Le FMI a fait un premier pas pour réfléchir sur les conséquences de son utilisation répétée. ANDREAS HÖFERT* La conférence annuelle Jacques Polak organisée par le Fond monétaire international (FMI) est généralement un rendez-vous académique au sommet. Des universitaires de haut niveau discutent des nouvelles avancées de la théorie économique et d’études empiriques avec l’équipe du FMI et des banquiers centraux. L’édition 2013, la 14e depuis sa création, s’intitulait «Crises d’hier et d’aujourd’hui». Ben Bernanke y a participé pour la dernière fois en tant que gouverneur de la Réserve fédérale américaine. Aussi, l’événement a pris les traits d’un bilan des politiques mises en œuvre pendant ses huit années de mandat, et surtout des cinq dernières années, celles qui ont suivi la faillite de Lehman. Deux des documents présentés, rédigés par des fonctionnaires de la Fed, méritent une attention toute spéciale car ils donnent un aperçu des rouages décisionnels de l’institution et de l’héritage de Ben Bernanke. Le premier article, intitulé «The Federal Reserve’s Framework for Monetary Policy Recent Changes and New Questions», analyse les «innovations» de politique monétaire mises en place par la Fed et par d’autres banques centrales dans l’environnement post-crise financière. Il conclut que les schémas d’intervention actuels ne sont pas définitifs et pourraient continuer à évoluer. Le second article, intitulé «Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy», évalue les possibles effets négatifs de la crise financière sur le taux de croissance potentiel et le taux de chômage «naturel» aux Etats-Unis. Ses auteurs estiment que «le PIB potentiel est actuellement inférieur de 7% à ce qu’il serait si la trajectoire d’avant 2007 s’était poursuivie». Cette conclusion a conduit Paul Krugman, prix Nobel d’économie, qui participait à la conférence à s’offusquer dans un de ses éditoriaux hyper-keynésiens dans le New York Times, sur l’économie américaine «qui s’automutile». Sa solution? Des politiques fiscales et monétaires encore plus expansives que celles pratiquées actuellement. Abstraction faite de cette analyse qui illustre, selon les termes attribués à Albert Einstein, qu’«on ne peut pas résoudre un problème avec le même type de pensée que celui qui l’a créé», cette réduction énorme du potentiel de production – près de mille milliards de dollars US par an – indique clairement qu’il est temps de se livrer à une réflexion critique sur l’efficacité réelle du Quantitative Easing (QE). Tout d’abord, si le PIB potentiel a diminué et le taux de chômage naturel augmenté depuis la crise aux Etats-Unis comme l’estiment les chercheurs de la Fed, alors une politique visant à renouer avec les chiffres d’avant la crise pourrait échouer complètement et faire plus de mal que de bien. Ensuite, il faut se demander, dans le déclin estimé, quelle est la part de responsabilité des politiques économiques actuelles, et surtout de la politique monétaire ultra-accommodante. Larry Summers, ancien candidat à la succession de Ben Bernanke à la présidence de la Fed, s’est fait l’avocat du diable lors de la conférence. «Dans les années à venir, nous ferions mieux de nous demander comment gérer une économie dans laquelle le taux d’intérêt nominal nul est un frein chronique et systémique à l’activité économique. […] On ne peut que s’inquiéter lorsque l’on constate que la politique monétaire et la politique fiscale produisent aujourd’hui moins de résultats que par le passé», a-t-il martelé, fustigeant les mesures prises, dont l’objectif fondamental consiste selon lui à «réduire les prêts, les emprunts et à gonfler les prix des actifs». Le point de vue de Larry Summers commence à trouver un écho parmi les économistes. L’argent facile débloqué par les programmes d’assouplissement quantitatif, qui distord les prix de marché, pourrait en fait produire des résultats contraires à ses objectifs. Au lieu d’encourager l’octroi de crédit et de dynamiser l’activité du secteur privé, cette politique, associée à l’objectif d’assainissement des bilans des intermédiaires financiers, incite ces derniers à acheter des actifs sûrs, donc à coopérer avec la Fed et à garantir un financement à peu de frais au gouvernement américain, au lieu de prêter aux particuliers. On parle habituellement d’«effet d’éviction» lorsque la dette publique fait grimper les taux d’intérêt, renchérissant le financement des investissements du secteur privé. Le QE pourrait aboutir à une situation paradoxale. En maintenant artificiellement les taux d’intérêt à un bas niveau et en redirigeant en fin de compte tout l’argent bon marché vers le gouvernement, il pourrait produire exactement les mêmes résultats qu’un effet d’éviction classique alors que les taux d’intérêts sont bas. Cette question mérite plus ample réflexion. Il me semble que la dernière conférence du FMI a fait un premier pas dans ce sens. * Chef économiste, UBS Wealth Management 2. STABILITÉ FINANCIÈRE McKinsey - QE and ultra-low interest rates Distributional effects and risks (executive summary) McKinsey Global Institute QE and ultra-low interest rates: Distributional effects and risks Executive summary In response to the global ﬁnancial crisis and recession that began in 2007, the major central banks in a number of advanced economies—in particular, the United States, the United Kingdom, the Eurozone, and Japan—embarked upon an unprecedented effort to stabilize and inject liquidity into ﬁnancial markets. In the immediate aftermath of the crisis, central bank action was aimed at preventing a catastrophic failure of the ﬁnancial system. In the years since, central banks have continued to employ a range of conventional and unconventional monetary policy tools to support growth and revive the ﬂow of credit to their economies. There is widespread consensus that the decision to implement these monetary policies was an appropriate—and indeed necessary—response in the early days of the ﬁnancial crisis given the magnitude of the economic shock to the global economy. More than ﬁve years later, however, central banks are still using conventional monetary tools to cut short-term interest rates to near zero and, in tandem, are deploying unconventional tools to provide liquidity and credit market facilities to banks, undertaking large-scale asset purchases—or quantitative easing (QE)—and attempting to inﬂuence market expectations by signaling future policy through forward guidance. These measures, along with a lack of demand for credit given the global recession, have contributed to a decline in real and nominal interest rates to ultra-low levels that have been sustained over the past ﬁve years. Many academic and central bank studies have found that the measures taken by central banks prevented a deeper recession and higher unemployment than would have otherwise been the case. Estimates from macroeconomic models by the US Federal Reserve, the Bank of England, and others show that, compared with a scenario in which no such action was taken, unconventional monetary policies have improved GDP by between 1 and 3 percent, reduced the unemployment rate by about 1 percentage point, and prevented deﬂation.1 If the emergency measures employed at the start of the ﬁnancial crisis did indeed head off an uncontrolled downward spiral of the global ﬁnancial system, then the macroeconomic value of the damage prevention could be far larger than these estimates indicate. This paper is our contribution to an ongoing debate about these central bank policies. In particular, our research seeks to shed light on the distributional effects of unconventional monetary policies at the microeconomic level—including the impact on governments, non-ﬁnancial corporations, banks, insurance companies, pension funds, and households. Although there are always some distributional 1 For a summary of the literature, see Global impact and challenges of unconventional monetary policy, International Monetary Fund (IMF) policy paper, October 7, 2013; John C. Williams, “Lessons from the ﬁnancial crisis for unconventional monetary policy,” presented at a panel discussion at the National Bureau of Economic Research (NBER) Conference in Boston, Massachusetts, October 18, 2013; and Eric Santor and Lena Suchanek, “Unconventional monetary policies: Evolving practices, their effects and potential costs,” Bank of Canada Review, spring 2013. 1 2 effects from monetary policy, these are likely to be far larger than in normal economic times given the scale of monetary actions in recent years. Speciﬁcally, in our research we assess the impact on net interest income for these groups in the United States, the United Kingdom, and the Eurozone, evaluate the effect of low rates on asset prices and any corresponding wealth effect for households, and consider what impact ultra-low rates have had on cross-border capital ﬂows to emerging markets. We conclude with a discussion of potential risks, in the light of this micro research, as either these policies are tapered and interest rates rise, or rates remain low. Our headline ﬁnding is that ultra-low interest rates have produced signiﬁcant distributional effects if we focus exclusively on the impact on interest income and interest expense. Although governments have borne substantial costs generated by the ﬁnancial crisis and the resulting recession, ultra-low interest rates prompted by monetary policy have substantially lowered their borrowing costs, enabling them, in some cases, to ﬁnance higher public spending to support economic growth. Non-ﬁnancial corporations have also beneﬁted as the cost of debt has fallen, although this has not translated into increased investment, perhaps because the recession has lowered their expectations of future demand. Households, in contrast, have fared less well in terms of interest income and expense, although the negative impact on household income may be offset by wealth gains from increased asset prices. Our analysis merits two caveats. In all analysis on the impact of unconventional monetary policies and ultra-low interest rates, we, along with other researchers on the topic, face the challenge of assessing what would have happened if these policies had not been implemented—the so-called counterfactual. This is unknown and indeed unknowable. Nevertheless, we have used a variety of approaches to estimate how the actual outcome would have compared with a situation in which central banks had not acted the way they did. In addition, our microeconomic analysis looks only at the direct impact on speciﬁc sectors, not second-order effects across the economy. It seems likely that central bank actions stabilized the ﬁnancial system, limited the damage from the ﬁnancial crisis, and dampened the recession, thereby beneﬁting all actors in the economy. Nonetheless, we believe that examining the microeconomic consequences—even if these were unintended—is useful in understanding the distributional effects and risks of ultra-low rate policies and in shedding light on the future as these policies are reversed. Our major ﬁndings include the following: Between 2007 and 2012, ultra-low interest rates produced large distributional effects on different sectors in advanced economies through changes in interest income and interest expense. By the end of 2012, governments in the United States, the United Kingdom, and the Eurozone had collectively beneﬁted by $1.6 trillion, through both reduced debt service costs and increased proﬁts remitted from central banks. Meanwhile, households in these countries together lost $630 billion in net interest income, with variations in the impact among demographic groups. Younger households that are net borrowers have beneﬁted, while older households with signiﬁcant interestbearing assets have lost income. Non-ﬁnancial corporations across these countries beneﬁted by $710 billion through lower debt service costs. McKinsey Global Institute QE and ultra-low interest rates: Distributional effects and risks The era of ultra-low interest rates has eroded the proﬁtability of banks in the Eurozone.2 Effective net interest margins for Eurozone banks have declined signiﬁcantly, and their cumulative loss of net interest income totaled $230 billion between 2007 and 2012. In contrast, banks in the United States have experienced an increase in effective net interest margins as interest paid on deposits and other liabilities has declined more than interest received on loans and other assets. From 2007 to 2012, the net interest income of US banks increased cumulatively by $150 billion. Over this period, therefore, there has been a divergence in the competitive positions of US and European banks. The experience of UK banks falls between these two extremes. Life insurance companies, particularly in several European countries, are being squeezed by ultra-low interest rates. Those insurers that offer customers guaranteed-rate products are ﬁnding that government bond yields are below the rates being paid to customers. If the low interest-rate environment were to continue for several more years, many of these insurers would ﬁnd their survival threatened. The impact of ultra-low rate monetary policies on ﬁnancial asset prices is ambiguous. Bond prices rise as interest rates decline, and, between 2007 and 2012, the value of sovereign and corporate bonds in the United States, the United Kingdom, and the Eurozone increased by $16 trillion. But we found little conclusive evidence that ultra-low interest rates have boosted equity markets. Although announcements about changes to ultra-low rate policies do spark short-term market movements in equity prices, these movements do not persist in the long term. Moreover, there is little evidence of a large-scale shift into equities as part of a search for yield. Price-earnings ratios and price-book ratios in stock markets are no higher than long-term averages. Ultra-low interest rates are likely to have bolstered house prices, although the impact in the United States has been dampened by structural factors in the market. At the end of 2012, house prices may have been as much as 15 percent higher in the United States and the United Kingdom than they otherwise would have been without ultra-low interest rates, as these rates reduce the cost of borrowing. We based this estimate on academic research using historical data that suggest how housing prices rise as interest rates decline. In the United Kingdom, it is plausible that this relationship holds today. However, in the United States, it is unclear whether the historical relationship between interest rates and housing prices holds today because of an oversupply of housing and tightened credit standards. If one accepts that house prices and bond prices are higher today than they otherwise would have been as a result of ultra-low interest rates, the increase in household wealth and possible additional consumption it has enabled would far outweigh the income lost to households. However, while the net interest income effect is a tangible inﬂuence on household cash ﬂows, additional consumption that comes from rising wealth is less certain, particularly since asset prices remain below their peak in most markets. It is also difﬁcult today for households to borrow against the increase in wealth that came through rising asset prices. 2 We should point out that other factors are also at work here beyond just low interest rates. 3 4 Ultra-low interest rates appear to have prompted additional capital ﬂows to emerging markets, particularly into their bond markets. Purchases of emerging-market bonds by foreign investors totaled just $92 billion in 2007 but had jumped to $264 billion by 2012. This may reﬂect a rebalancing of investor portfolios and a search for higher returns than were available from bonds in advanced economies, as well as the fact that overall macroeconomic conditions and credit risk in emerging economies have improved. In some developing economies, including Mexico and Turkey, the percentage increases in capital inﬂows into bonds have been even larger. Emerging markets that have a high share of foreign ownership of their bonds and large currentaccount deﬁcits will be most vulnerable to large capital outﬂows if and when monetary policies become less accommodating in advanced economies and interest rates start to rise. This paper is divided into ﬁve chapters. In Chapter 1, we provide a brief overview of central bank measures since the start of the ﬁnancial crisis. Chapter 2 discusses the impact of central bank action on the interest income and expense of various sectors in advanced economies. In Chapter 3, we assess the effects of central bank action on asset prices and its impact on wealth and consumption. In Chapter 4, we examine the evidence that ultra-low rate monetary policies have prompted a surge in capital ﬂows to emerging economies. Finally, in Chapter 5, we discuss the potential risks that may arise when interest rates begin to rise as well as if they remain at ultra-low levels. 2. STABILITÉ FINANCIÈRE ECB - Financial stability Review 11.2013 [overview] OVERVIEW Financial stress has remained moderate in the euro area in recent months, despite periods of considerable global financial market turbulence. Measures of systemic stress in the banking sector have declined markedly since the peaks that followed the intensification of the sovereign debt crisis in mid-2011 (see Chart 1). A broad composite measure of systemic stress across major euro area financial asset classes has fallen even further, to lows not seen since global financial strains first emerged in the summer of 2007. Euro area stress moderate amid financial market stress… This resilience partly reflects the improvement of euro area fundamentals since the height of the euro area crisis in 2011. Fiscal consolidation and structural reforms have continued in the euro area, though at an uneven pace across countries. At the same time, higher capital and liquidity buffers are being built up in the banking sector, strengthening shock-absorption capacity, which should improve bank performance over time. Complementing national policy measures, tangible progress has been made towards building a banking union. The progress in the area of banking is matched E\ GHYHORSPHQWV LQ ILQDQFLDO PDUNHWV ZKHUH ERQG DQG HTXLW\ PDUNHW LQGLFDWRUV ° VXFK DV \LHOG GLIIHUHQWLDOVDQGFXUYHVORSHV°UHIOHFWDIDYRXUDEOHUHHYDOXDWLRQRIHXURDUHDIXQGDPHQWDOVYLVjYLV other economic regions (particularly emerging market economies), as well as somewhat lower intra-area fragmentation over the last half-year. … as euro area fundamentals continue improving Notwithstanding these advances, the euro area adjustment process remains incomplete. Further efforts are needed to remove the risk of further negative interactions, at the country level, among stressed sovereigns, diverging economic growth prospects and bank fragility. First, there is a need to correct a loss of competitiveness which has restrained economic growth in some countries, as well as to further address remaining public and private sector indebtedness. Second, the outlook for EDQNSURILWDELOLW\UHPDLQVZHDNWKLVLVSDUWO\EHFDXVHWKHSURFHVVRIEDQNUHVWUXFWXULQJ°LQFOXGLQJ GRZQVL]LQJ ° UHPDLQV LQFRPSOHWH DQG SDUWO\ due to the protracted impact of loan losses on Chart 1 Measures of financial market and banking sector stress in the euro area provisions and reported earnings. Aggravating this, considerable (albeit diminished) -DQ°1RY fragmentation in the availability and cost of probability of default of two or more LCBGs bank funding persists in some countries. To (percentage probability; left-hand scale) help resolve these hurdles, further progress composite indicator of systemic stress (CISS) (right-hand scale) towards establishing a banking union will make 32 0.8 an important contribution. As preparations for May FSR the operational start of the single supervisory 28 0.7 mechanism gain momentum, complementary 24 0.6 steps are needed to establish a single and effective European common bank resolution 20 0.5 framework. But financial stability conditions remain fragile The above-mentioned vulnerabilities, as well as the challenges inherent in a global economy only slowly emerging from the financial and economic crisis, help explain the prospective risks for euro area financial stability depicted in Table 1. The four risks in the table are listed VHSDUDWHO\IRUFODULW\EXWDUHQRWLQGHSHQGHQW° rather, if triggered they have the potential to be mutually reinforcing. 16 0.4 12 0.3 8 0.2 4 0.1 0 Four key risks to euro area financial stability 0.0 2007 2008 2009 2010 2011 2012 2013 Sources: Bloomberg and ECB calculations. Note: See Charts 2.3 and 3.13 for more details on these indicators. ECB Financial Stability Review November 2013 7 Table 1 Key risks to euro area financial stability Current level (colour) and recent change (arrow)* 1. Economic and financial shocks that affect asset valuations and bank profitability, eroding confidence in the euro area financial sector 2. Renewed tensions in sovereign debt markets as a result of delayed national reforms, unforeseen bank recapitalisation needs or a rise in global bond yields 3. Global financial market turbulence, with asset mispricing and low market liquidity 4. Bank funding challenges in stressed countries that force banks to deleverage excessively pronounced systemic risk medium-level systemic risk potential systemic risk * The colour indicates the current level of the risk which is a combination of the probability of materialisation and an estimate of the likely systemic impact of the identified risk, based on the judgement of the ECB’s staff. The arrows indicate whether this risk has intensified since the previous FSR. Key risk 1: Economic and financial shocks that affect asset valuations and bank profitability, eroding confidence in the euro area financial sector A weak economy is weighing on bank profitability… Profit generation continues to be a challenge for euro area banks. The protracted economic downturn since 2011 has impacted credit quality, while interest margins have remained compressed. Subdued growth prospects and high unemployment continue to weigh on bank performance in a number of euro area countries, particularly when interacting with high private sector indebtedness (see Chart 2). Any upward spike in interest rates from low levels, for instance given turbulence in global bond markets, could also present challenges for bank profitability. Recent macroeconomic data have contained promising signs that the euro area is emerging from a business cycle trough. Economic sentiment data, in particular, have been pointing to an expansion gaining traction following a year and a half of recession in the euro area. However, the recovery remains gradual, with the latest ECB staff macroeconomic projection of an increase in euro area real GDP of 1.0% in 2014. Moreover, downside risks surrounding the macroeconomic outlook for the euro area dominate, also aggravated by increasing downside risks to the health of emerging market economies, which have contributed strongly to global economic growth over the last years. A potentially weak economic recovery presents challenges for a return to more profitable intermediation activity of banks. An increasing recognition of loan losses suggests banks are internalising the impacts of a weak economy on credit quality. Non-performing loans (NPLs) 8 ECB Financial Stability Review November 2013 Chart 2 Unemployment, economic growth and private sector indebtedness across euro area countries (percentages) x-axis: unemployment rate (September 2013) y-axis: real GDP growth forecast for 2013 4 4 LU 2 AT 0 MT SK EE FR DE IE 2 BE NL -2 FI IT ES PT 0 -2 SI GR -4 -6 -4 -6 -8 -8 CY -10 0 5 10 15 20 25 -10 30 Sources: Eurostat and ECB. Notes: The size of the bubbles shows the size of private sector indebtedness as a percentage of GDP as of the second quarter of 2013. Data on non-financial firms include cross-border inter-company lending, which may be particularly relevant for countries where international holding companies are traditionally located (e.g. Ireland and Luxembourg). OVERVIEW and the associated provisioning have grown to such an extent that they have been the major contributor to the low return on assets of euro area significant banking groups since 2009 (see Chart 3). Around 130 significant euro area banks will fall under the direct supervision of the ECB in November 2014. Accordingly, this Review introduces a new set of “significant banking groups³6%*V°WKHFRQVROLGDWHG group level analogue of these significant banks, which amounts to up to 90 banking groups (depending on data availability). Alongside this new group of banks, the Review also retains its traditional analysis of “large and complex banking groups” (LCBGs), both at the euro area and global level. Box 5 contains further details on these bank samples. Up to now, impaired loan growth has been disproportionately affecting euro area banks outside the group of largest banks (see Chart 4). Determining an appropriate degree of provision coverage during periods of economic uncertainty is complex, given the multitude of decisions needed regarding the appropriate classification of loans and realistic collateral valuation. But on aggregate, although provisioning is increasing, it has barely kept pace with the deterioration in asset quality, on average, highlighting a potential further need for additional reserves to strengthen bank balance sheet resilience in case asset quality deteriorates further. Prima facie, provisioning needs would be greatest where there is a combination of exposures to highly indebted households and firms, volatile asset prices (notably property prices), rising unemployment and weak domestic demand. Such vulnerabilities might also interact in some countries with lengthy legal procedures in case of borrower insolvency, thereby fostering balance sheet uncertainty and constraining banks’ lending ability. Chart 3 Pre- and post-provision return on assets of euro area banks Chart 4 Impaired loans of euro area banks +°+SHUFHQWDJHVPHGLDQV +°+SHUFHQWDJHRIWRWDOORDQVWKDQGWK percentiles and interquartile range distribution across significant banking groups) median for significant banking groups median for large and complex banking groups pre-provision return on assets return on assets 1.6 1.6 1.4 1.4 1.2 1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 2013 2007 2008 2009 2010 2011 2012 Source: SNL Financial. Note: Based on publicly available data on significant banking groups that report semi-annual financial statements. 24 24 22 22 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 2007 2008 2009 2010 2011 2012 2013 Source: SNL Financial. Note: Based on publicly available data on SBGs, including LCBGs, that report semi-annual financial statements. ECB Financial Stability Review November 2013 9 … amid a continued strengthening of regulatory capital ratios… These challenges, which are in many ways tied to the economic cycle, contrast with a structural improvement in the solvency positions of euro area banks. The median core Tier 1 capital ratio IRUHXURDUHDVLJQLILFDQWEDQNLQJJURXSVUHDFKHGLQWKHILUVWKDOIRI°DPRUHWKDQIRXU percentage point increase from the beginning of the global financial crisis in 2008. This progress also corresponds to further steps towards meeting more stringent Basel III requirements over time. Progress in reducing simple (i.e. not risk-weighted) measures of balance sheet leverage has, however, been more mixed. Higher capital levels, complemented by contained use of balance sheet leverage, as foreseen in the Basel III guidelines, should provide a more solid buffer against possible losses and a more sustainable basis for banking activity going forward. … but further action appears needed Continued action is needed to mitigate lingering investor scepticism regarding euro area bank balance sheets. Market valuations for euro area banks have remained below their book valuation since 2009, while those of US peers have risen above 1 during 2013. While some of this difference may relate to subdued profitability prospects for euro area banks, it also relates to questions regarding asset quality transparency, which would benefit from more extensive disclosure, a cleaning-up of bank balance sheets and removal of legal obstacles to NPL resolution. Importantly, the ECB has started a comprehensive assessment of the most significant euro area banks, which are expected to fall under its supervisory remit in November 2014. The achievement of the three main goals of this exercise, namely to (i) enhance transparency, through the quality of information available on the condition of banks, (ii) provide the basis for repairing those balance sheets which are stretched by identifying and implementing necessary corrective actions as needed, and (iii) build confidence by assuring all stakeholders that banks are fundamentally sound and trustworthy, will be positive for financial stability. In settings where weak profits prevent banks from increasing capital via retention of earnings, banks need to consider alternative avenues for raising additional external capital. Key risk 2: Renewed tensions in sovereign debt markets as a result of delayed national reforms, unforeseen bank recapitalisation needs or a rise in global bond yields Sovereign tensions remain contained… Following their significant easing in the second half of 2012, sovereign tensions have remained contained despite observed volatility in global financial markets. Spreads of ten-year sovereign bond yields over benchmark overnight index swap rates currently stand around the same levels DV WKRVH WKDW SUHYDLOHG LQ 0D\ WKLV \HDU ° SULRU WR WKH RQVHW RI JOREDO ERQG PDUNHW YRODWLOLW\ ° for most countries. Importantly, such spreads have fallen over the period for several countries subject to intermittent stress over the last years, to the tune of 55 basis points in Spain, 50 basis points in Ireland, 30 basis points in Italy and 25 basis points in Portugal. Relatively less favourable developments for the latter two countries can be linked to political uncertainty during the summer. In stark contrast to more severe stress phases over the last years, these uncertainties at the country level have been digested by markets as idiosyncratic rather than systemic in nature, with limited spillover effects on broader market sentiment. These bond market developments are also reflected in credit default swap (CDS) pricing, where CDS spread levels for sovereigns are well below the peaks witnessed during the more acute phases of the crisis. That said, the CDS-implied sovereignbank link in the euro area still appears stronger than in other economies such as the United States (see Chart 5). … but the need for further policy action remains Continued adjustment towards sustainable fiscal positions has helped to underpin this improved market sentiment towards euro area sovereigns. Such adjustment nonetheless remains incomplete for several countries (see Chart 6). These fiscal imbalances, amplified by competitiveness shortfalls, 10 10 ECB Financial Stability Review November 2013 OVERVIEW Chart 5 Sovereign and bank CDS spreads Chart 6 General government debt and deficits in the euro area -XO\°1RYEDVLVSRLQWV (2013; percentage of GDP) x-axis: sovereign CDS spreads y-axis: bank CDS spreads euro area, July 2011 – May 2013 euro area, May – Nov. 2013 global, July 2011 – May 2013 global, May – Nov. 2013 450 x-axis: public deficits y-axis: general government debt 450 180 180 Greece 400 400 160 350 350 140 300 300 120 250 250 100 200 200 80 150 150 60 100 100 40 50 50 20 160 Italy Portugal 140 Ireland Cyprus Belgium France Spain Germany Netherlands Austria Malta Slovenia Finland Slovakia Luxembourg 120 100 80 60 40 20 Estonia 0 0 50 0 100 150 200 250 300 350 400 450 Sources: Bloomberg and ECB calculations. Note: Average CDS spread for euro area and global LCBGs versus the average sovereign CDS spread where the LCBGs are headquartered (France, Germany, Italy, Spain and the Netherlands for euro area LCBGs and the United States, the United Kingdom, Switzerland, Denmark, Sweden and Japan for global LCBGs). 0 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Source: European Commission. remain closely linked to prevailing sovereign bond market premia. While the fiscal and structural adjustment to date in several member countries has been noteworthy, implementation risks remain a cause for concern. These concerns relate to any potential for reform fatigue or complacency at the national level. Importantly, implementation risks are also present at the supra-national level, where strains could re-emerge should policy advances stall towards completing EMU and durably weakening the links between sovereigns and banks. Moreover, the current situation involving more benign market conditions remains fragile, and could be shattered in the event of renewed global bond market turbulence. Fiscal vulnerabilities are only one element underlying the adverse feedback between sovereigns, domestic banks and macroeconomic conditions at the heart of past euro area strains. Weakening the negative feedback loop between banks and sovereigns requires a multi-pronged strategy at WKH QDWLRQDO OHYHO WR HQVXUH SXEOLF GHEW VXVWDLQDELOLW\ ° EDODQFLQJ D QHHG WR DGGUHVV ERWK ILVFDO LPEDODQFHVDQGHFRQRPLFJURZWK°ZKLOHDWWKHVDPHWLPHDGGUHVVLQJWKHULVNRIFRQWLQJHQWOLDELOLWLHV for sovereign balance sheets stemming from the banking sector. The European Commission’s rules on state aid to banks have helped to clarify an EU-wide regime for public interventions in troubled financial institutions. Building upon this progress, further steps are needed to clarify backstops for ILQDQFLDOVHFWRUGLVWUHVV°EHWKH\SXEOLFRUSULYDWH°DWWKHQDWLRQDORU(XURSHDQOHYHO ECB Financial Stability Review November 2013 11 11 Key risk 3: Global financial market turbulence, with asset mispricing and low market liquidity A global bond market correction... Starting in May, there was a significant repricing in global bond markets, which took place largely EHFDXVH RI FKDQJLQJ PRQHWDU\ SROLF\ H[SHFWDWLRQV LQ WKH 8QLWHG 6WDWHV ° ZLWK LQFUHDVHG IRUHLJQ exchange market volatility and stress borne largely by emerging market economies. Euro area bond PDUNHWLPSDFWVZHUHKRZHYHUDOVRDSSDUHQW°DQGFDQEHGLIIHUHQWLDWHGE\WZRNH\SKDVHV ... with differing impacts on benchmark rates and risk premia A first sovereign bond market adjustment phase involved sharp upward movements in key global benchmark interest rates, compounded by increased premia on riskier assets. What became a global bond market sell-off started in May and continued largely unabated until the end of June. Reflecting an uncertain global economic growth outlook, the sell-off was particularly pronounced IRU DVVHWV SHUFHLYHG DV ULVNLHU ° LQFOXGLQJ VRYHUHLJQ GHEW RI YXOQHUDEOH HXUR DUHD FRXQWULHV VHH &KDUW 7LPHO\ IRUZDUG JXLGDQFH RQ PRQHWDU\ SROLF\ LQ -XO\ ° IURP ERWK WKH (&% DQG WKH %DQN RI (QJODQG ° DWWHQXDWHG XQIRXQGHG XSZDUG PRYHPHQWV LQ (XURSHDQ PRQH\ PDUNHW rates. These measures contributed to a second phase of global bond market adjustment, this time involving a decline in global risk aversion and credit spreads. Ultimately, following this global bond market turbulence, benchmark yields have increased across the globe. The upward drift in yields was greatest in emerging market economies as well as perceived “safe havens”. Overall, ten-year US benchmark Treasury yields stand over 100 basis points higher than their early May level, similar to the average increase across a broad group of emerging market economies. For the euro area, benchmark German Bund yields are up by 50 basis points from their May levels, while on average bond yields in more vulnerable euro area countries such as Ireland, Italy and Spain have fallen back to their May 2013 levels. Chart 7 Cumulative changes in ten-year sovereign bond yields since May Chart 8 Bond holdings of euro area MFIs, insurers and pension funds and investment funds (2 May – 15 Nov. 2013; cumulative change in basis points since 2 May) (Q2 2013; percentage of total assets) United States emerging markets Germany stressed euro area countries non-euro area corporate and government bonds euro area corporate bonds euro area government bonds 160 45 45 140 40 40 120 120 35 35 100 100 30 30 80 80 25 25 60 60 20 20 40 40 15 15 20 20 10 10 0 0 5 5 -20 0 160 140 -20 May 22 May Bernanke testimony June July 4 July ECB forward guidance Aug. 2013 Sep. Oct. Nov. Source: Bloomberg. Note: “Stressed euro area countries” refers to the average of bond yields in Ireland, Italy, Portugal and Spain. 12 12 ECB Financial Stability Review November 2013 0 MFIs excl. ESCB Insurers and pension funds Sources: ECB and ECB calculations. Investment funds OVERVIEW The financial stability consequences of this turbulence require an understanding of the distribution RI ORVVHV ° VRPHWKLQJ ZKLFK LV XQIRUWXQDWHO\ QRW SRVVLEOH WR DFFXUDWHO\ PHDVXUH JLYHQ OLPLWHG aggregate information on hedging. For the United States, estimates from the Federal Reserve suggest capital losses for US bond holders alone were around 10% through early summer 2013. Though significant, this figure was lower than the losses resulting from previous noteworthy bond market adjustments, in particular the turbulent episode in 1994. Within the euro area, direct exposure to debt markets as a proportion of assets appears to fall mainly on the side of institutional investors and less on banks (see Chart 8). That said, incomplete information on where absolute losses were greatest obfuscates a complete understanding of vulnerabilities which have resulted from bond market turbulence to date. It cannot be ruled out that ultimate exposures are concentrated among a limited number of entities which may now be more vulnerable to any further severe market shock. Such losses are potentially compounded by an environment of historically low prevailing yields in some countries, which continues to constitute a risk for institutional investors such as insurance companies. Uncertain distribution of losses… The recent global financial market turbulence might be a harbinger of further realignment of risk premia with fundamentals in bond markets (or even an overshooting), not least as yields on higher-rated sovereign and high-yield corporate bonds remain at historically low levels. Moreover, recent outflows from bond funds have been low compared with the substantial inflows since 2009, while the outflows to date have depleted cash cushions, in particular for emerging market funds, leaving them more vulnerable to further redemptions. Reduced cash buffers, combined with low secondary market liquidity in emerging and corporate bond markets, could amplify future asset price developments. In addition, recent bond losses may place additional pressure on investors to seek yield and avoid duration, which could push investors into leveraged positions and/or lowerquality assets with low liquidity. Lastly, euro area financial stability could suffer should spillovers accompany any onset of stress in key emerging market economies. … while the possibility of further corrections remains As the potential for further adjustment remains significant, supervisors need to ensure that banks, insurers and pension funds have sufficient buffers and/or hedges to withstand a normalisation of yields by stress-testing their balance sheets. Stable and predictable macroeconomic policies, as well as efforts (such as forward guidance) to reduce market uncertainty surrounding central banks’ reaction functions, are key to ensuring a smooth exit from non-standard central bank measures without an abrupt rise in bond yields. Stable and predictable policies are key to prevent abrupt risk reversal Key risk 4: Bank funding challenges in stressed countries that force banks to deleverage excessively Bank funding conditions in the euro area continue to normalise. Average composite bank funding costs reached their lowest level for more than three years for most countries (see Chart 9) and across all major debt instruments. In addition, country fragmentation in deposit-based funding has subsided, with continued deposit inflows in most countries, including for several countries under stress. As a result, euro area banks’ funding structures have continued to shift towards arguably PRUH VWDEOH ° DQG DZD\ IURP PRUH YRODWLOH ° IXQGLQJ VRXUFHV ,QGHHG WKH VKDUHV RI ZKROHVDOH funding and foreign deposits have fallen further, in part stemming from a gradual deleveraging process in the euro area banking sector. A fall in excess liquidity in the euro area has corresponded to reduced reliance on central bank funding, with around half of the initial amount of the three-year longer-term refinancing operations (LTROs) repaid before maturity. Bank funding conditions continue to improve on aggregate… These positive developments on aggregate have not been sufficient to eliminate fragmentation in bank funding markets. Funding remains fragmented in terms of the availability and the cost … but fragmentation persists… ECB Financial Stability Review November 2013 13 Chart 9 Composite bank cost of deposit and unsecured market debt funding in selected euro area countries Chart 10 Net issuance of senior unsecured (debt and covered bonds in the veuro area) -DQ°6HSSHUFHQWDJHVPD[LPXPPLQLPXPUDQJH across the four largest euro area countries) -DQ°2FW(85ELOOLRQVPRQWKQHWLVVXDQFH moving sum) maximum-minimum range euro area average covered bonds (non-stressed countries) senior unsecured debt (non-stressed countries) covered bonds (stressed countries) senior unsecured debt (stressed countries) net issuance (total) 5 5 4 4 3 3 2 2 1 1 0 0 2010 2011 2012 2013 Sources: ECB, Merrill Lynch Global Index and ECB calculations. Note: Deposit rates (for both retail and institutional investors) and cost of market-based debt financing for Germany, France, Italy and Spain, weighted using outstanding amounts taken from the ECB’s MFI balance sheet statistics. 100 100 50 50 0 0 -50 -50 -100 -100 -150 -150 -200 -200 -250 -250 -300 2010 2011 2012 2013 -300 Source: Dealogic. Note: Excludes retained deals. of market funding both according to the country where banks are located and their balance sheet strength (which, in turn, is tightly correlated with bank size). While debt issuance has fallen markedly for most banks since 2010 (see Chart 10), issuance by smaller banks from vulnerable countries over the last 12 months is 70% down from a comparable period leading up to mid-2011. Clearly, access to medium- and longer-term funding at sustainable costs remains a challenge for a number of mid-sized and smaller euro area banks in stressed countries. With sizeable amounts of bank debt maturing over the coming months, persistently high funding costs for a set of challenged EDQNVFRXOGDPSOLI\SUHVVXUHVIRUGHOHYHUDJLQJRIDGLVRUGHUO\QDWXUH°ZLWKDQDVVRFLDWHGQHJDWLYH impact on economic welfare and growth. … and confidence in banks needs to be reinforced While much of the prevailing fragmentation appears to have economic underpinnings, regulatory uncertainty regarding the potential for bailing-in of creditors might also play a role. In this respect, work continues to clarify resolution arrangements. While such measures are necessary, further steps towards a genuine euro area banking union would durably address fragmentation, assuaging remaining concerns of not only bank investors but also depositors. ONGOING REGULATORY INITIATIVES Strengthening of the regulatory and supervisory frameworks has continued… 14 14 Progress towards a safer post-crisis financial environment continues, with advancements in European and global regulatory initiatives in the areas of financial institutions, markets and LQIUDVWUXFWXUHV0XFKRIWKHSURJUHVVPDGHUHIHUVWREDQNV°LQSDUWLFXODUWKHDGRSWLRQRIWKH&DSLWDO Requirements Regulation and Directive (CRR/CRD IV) that implements the Basel Committee’s new global standards for capital and liquidity (Basel III) in the EU as of 1 January 2014. ECB Financial Stability Review November 2013 OVERVIEW But perhaps the most significant achievement within the euro area concerns the advances towards a banking union. Among the various facets of a genuine banking union, progress has been greatest in moving towards a single supervisory mechanism (SSM), where concrete progress continues towards effective micro- and macro-prudential oversight being conferred upon the ECB. At the same time, headway continues to be made in relation to a second pillar of banking union and a QHFHVVDU\ FRPSOHPHQW WR VLQJOH VXSHUYLVLRQ ° QDPHO\ LQ WKH DUHD RI FRPPRQ UHVROXWLRQ 7KLV includes the establishment of an EU framework for bank recovery and resolution (BRRD), which will help to foster ex-ante clarity on the application of bail-in at the EU level, following instances earlier this year where a heterogeneity of approaches with respect to bail-ins of banks’ unsecured creditors created some uncertainty regarding consistency of creditor treatment in the event of bank distress. Progress in the area of common resolution has also been made with the European Commission’s proposal for a Single Resolution Mechanism (SRM) aimed at setting up a unique system for resolution, with a Single Resolution Board and a Single Bank Resolution Fund, for the resolution of banks in SSM-participating Member States. Advances in supervision and resolution require an eventual complement of a third pillar of banking union, namely a European system for deposit protection. … in particular with a banking union for the euro area Financial stability will benefit from continued progress in completing regulatory reform not only for banks, but also financial markets and infrastructures. From a euro area perspective, a swift and complete implementation of the building blocks of the banking union is arguably the most SUHVVLQJQHHG°JLYHQLWVSRWHQWLDOWRGXUDEO\DGGUHVVNH\ILQDQFLDOVWDELOLW\WKUHDWVRXWOLQHGLQWKLV Review, including by weakening feedback loops between banks and national authorities, whilst also fostering a reintegration of euro area financial markets which is a necessary complement to European Monetary Union. Notwithstanding the considerable regulatory progress to date, continued momentum is needed to strengthen oversight not only of banks, but also of a growing shadow banking sector and derivatives markets. ECB Financial Stability Review November 2013 15 2. STABILITÉ FINANCIÈRE Syndicate - Roubini, Back to housing bubbles CVTJOFTT!' !GJOBODF OPVSJFM!SPVCJOJ Opvsjf m !Spvcjoj-!b!qspgf t t ps!bu!OZV═t!Tuf so!Tdi ppm !pg!Cvt jof t t !boe!Di bjsn bo!pg!Spvcjoj Hm pcbm !Fdpopn jdt -!x bt !Tf ojps!Fdpopn jt u!gps!Jouf sobujpobm !Bggbjst !jo!ui f !X i juf !I pvt f (t !Dpvodjm pg!Fdpopn jd!Bewjt f st !evsjoh!ui f !Dm joupo!Ben jojt usbujpo/!I f !i bt !x psl f e!gps!ui f !Jouf sobujpobm Npof ubsz!Gvoe-!ui f !VT!Gf ef sbm !Sf t f swf -!boe!ui f !X psm e!Cbol / OPW!3: -!3124 Back to Housing Bubbles NEW YORK ╚It is widely agreed that a series of collapsing housing-market bubbles triggered the global financial crisis of 2008-2009, along with the severe recession that followed. While the United States is the best-known case, a combination of lax regulation and supervision of banks and low policy interest rates fueled similar bubbles in the United Kingdom, Spain, Ireland, Iceland, and Dubai. Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centers in Turkey, India, Indonesia, and Brazil. Signs that home prices are entering bubble territory in these economies include fastrising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt. In most advanced economies, bubbles are being inflated by very low short- and long-term interest rates. Given anemic GDP growth, high unemployment, and low inflation, the wall of liquidity generated by conventional and unconventional monetary easing is driving up asset prices, starting with home prices. The situation is more varied in emerging-market economies. Some that have high per capita income ╚for example, Israel, Hong Kong, and Singapore ╚have low inflation and want to maintain low policy interest rates to prevent exchange-rate appreciation against major currencies. Others are characterized by high inflation (even above the central-bank target, as in Turkey, India, Indonesia, and Brazil). In China and India, savings are going into home purchases, because financial repression leaves households with few other assets that provide a good hedge against inflation. Rapid urbanization in many emerging markets has also driven up home prices, as demand outstrips supply. With central banks ╚especially in advanced economies and the high-income emerging economies ╚wary of using policy rates to fight bubbles, most countries are relying on macro-prudential regulation and supervision of the financial system to address frothy housing markets. That means lower loan-to-value ratios, stricter mortgageunderwriting standards, limits on second-home financing, higher counter-cyclical capital buffers for mortgage lending, higher permanent capital charges for mortgages, and restrictions on the use of pension funds for down payments on home purchases. In most economies, these macro-prudential policies are modest, owing to policymakers╝political constraints: households, real-estate developers, and elected officials protest loudly when the central bank or the regulatory authority in charge of financial stability tries to take away the punch bowl of liquidity. They complain bitterly about regulators╝╟interference╠with the free market, property rights, and the sacrosanct ideal of home ownership. Thus, the political economy of housing finance limits regulators╝ability to do the right thing. To be clear, macro-prudential restrictions are certainly called for; but they have been inadequate to control housing bubbles. With short- and long-term interest rates so low, mortgage-credit restrictions seem to have a limited effect on the incentives to borrow to purchase a home. Moreover, the higher the gap between official interest rates and the higher rates on mortgage lending as a result of macro-prudential restrictions, the more room there is for regulatory arbitrage. For example, if loan-to-value ratios are reduced and down payments on home purchases are higher, households may have an incentive to borrow from friends and family ╚or from banks in the form of personal unsecured loans ╚to finance a down payment. After all, though home-price inflation has slowed modestly in some countries, home prices in general are still rising in economies where macro-prudential restrictions on mortgage lending are being used. So long as official policy rates ╚and thus long-term mortgage rates ╚remain low, such restrictions are not as binding as they otherwise would be. But the global economy╝s new housing bubbles may not be about to burst just yet, because the forces feeding them ╚especially easy money and the need to hedge against inflation ╚are still fully operative. Moreover, many banking systems have bigger capital buffers than in the past, enabling them to absorb losses from a correction in home prices; and, in most countries, households╝equity in their homes is greater than it was in the US subprime mortgage bubble. But the higher home prices rise, the further they will fall ╚and the greater the collateral economic and financial damage will be ╚when the bubble deflates. In countries where non-recourse loans allow borrowers to walk away from a mortgage when its value exceeds that of their home, the housing bust may lead to massive defaults and banking crises. In countries (for example, Sweden) where recourse loans allow seizure of household income to enforce payment of mortgage obligations, private consumption may plummet as debt payments (and event ually rising interest rates) crowd out discretionary spending. Either way, the result would be the same: recession and stagnation. What we are witnessing in many countries looks like a slow-motion replay of the last housing-market train wreck. And, like last time, the bigger the bubbles become, the nastier the collision with reality will be. http://www.project-syndicate.org/commentary/nouriel-roubini-warns-that-policymmakersare-powerless-to-rein-in-frothy-housing-markets-around-the-world á !2: : 6.3124!Qspkf du!Tzoejdbuf 3. VARIABLES DE NORMALISATION Bloomberg - Fed reveals new concerns about long-term US slowdown Fed Reveals New Concerns About Long-Term U.S. Slowdown By Rich Miller - Nov 26, 2013 Federal Reserve Chairman Ben S. Bernanke and his colleagues are suffering through their own form of cognitive dissonance: revealing new concerns about the economy’s long-term prospects even as they forecast faster growth in 2014. Worker productivity, a key component of an economy’s health, has risen at an annual clip of 1 percent during the last four years, as the U.S. has struggled to recover from the worst recession since the Great Depression. That’s less than half the 2.2 percent average gain since 1983, according to data from the Labor Department in Washington. “Slower growth in productivity might have become the norm,” the central bankers noted at their Oct. 29-30 meeting, according to the minutes released last week. That’s a switch from past comments by Bernanke that the deceleration probably was temporary and would end as the expansion continued. A combination of forces may be at work. Chastened by the deep economic slump, corporate executives have reduced spending plans for factories, equipment, research and development. Startup businesses have been held back as would-be entrepreneurs find it harder to get financing from still-cautious lenders. And out-of-work Americans have seen their skills atrophy the longer they’re without jobs. “We’re in a slow-growth period of unknown duration,” said Edmund Phelps, a professor at Columbia University in New Y ork and winner of the 2006 Nobel prize in economics. In his latest book, “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change,” Phelps argues that the U.S. has become sclerotic as entrenched corporate interests have stifled innovation. Bad News A lasting decline in the growth of productivity, or nonfarm business output per employee hour, would be bad news for the economy. Its potential -- the ability of the U.S. to expand over an extended period without generating inflation -- is determined by the sum of growth in the labor force and of productivity. A slowdown in the latter would limit how fast the U.S. can develop in the future. That, in turn, would have far-reaching implications for policy makers, company executives, working Americans and investors. Fed officials would need to be more alert to inflation risks if growth picked up. Lawmakers would face even more difficulties reducing the budget deficit because tax receipts would be lower. Companies might have to settle for reduced revenue, employees for smaller paychecks and investors for diminished returns as a result of the slower expansion. Lower Returns “The expected future return of equities is about 4 percent a year” over the next decade, Ray Dalio, founder of Bridgewater Associates LP, a $150 billion hedge fund based in Westport, Connecticut, said at a Nov. 12 DealBook conference in New Y ork. U.S. stocks have gained about 25 percent annually, including dividends, since reaching a 2009 low, as the Fed has kept its benchmark interest rate near zero and corporate profits have risen. Northwestern University Professor Robert Gordon has argued that the spurt in productivity associated with the computer and Internet revolution is over and as a result, the U.S. will be consigned to a long period of “dismal” growth. He predicted last year that between 2007 and 2027, gross domestic product per capita will rise at the slowest pace of any 20-year period in U.S. history going back to George Washington. “We had low productivity in the 1970s and 80s, and it certainly wasn’t a great time for the economy,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New Y ork. Consumer-price inflation topped out at 14.8 percent in 1980, while unemployment hit 10.8 percent in 1982. Scaled Back The Fed already scaled back its estimates of the economy’s potential to expand. Central bankers now peg the underlying growth rate at 2.1 percent to 2.5 percent, according to projections released Sept. 18. That’s down from the 2.4 percent to 3 percent they saw in April 2011. Based in part on the minutes, Feroli said policy makers are becoming reconciled to the possibility that the long-run rate is even lower. The former Fed researcher puts it at 1.75 percent and blames restrained capital spending and ebbing computer innovation for the slowdown. In a Nov. 20, 2012, speech in New Y ork, Bernanke said the financial crisis and its aftermath probably “reduced the potential growth rate” as discouraged workers dropped out of the labor force and businesses held back on investment. He voiced hope, though, that these drags on expansion wouldn’t last long. “The effects of the crisis on potential output should fade as the economy continues to heal,” he said. Cruising Speed A fall in the economy’s cruising speed wouldn’t preclude it from expanding faster than this rate for a while. It just means it couldn’t do so for a long time without overheating. A number of Fed policy makers forecast growth will pick up in 2014 as the impact of higher taxes and reduced government spending fades. Gross domestic product will rise 1.7 percent this year, according to the median forecast of private economists surveyed this month by Bloomberg. Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, predicts growth of 2.5 percent to 3 percent next year. Charles Plosser, head of the Philadelphia Fed, has said he anticipates growth at “around 3 percent.” Such a scenario argues for investors to hold more stocks than bonds now, according to Allen Sinai, chief executive officer of Decision Economics Inc. in New Y ork. Sinai, who sees growth accelerating to 2.8 percent in 2014, recommended a portfolio mix of 80 percent equities and 20 percent bonds in a Nov. 18 note to clients. Bernanke’s Argument Bernanke has portrayed the past few years’ deceleration in productivity as temporary. In an argument also espoused by Fed Vice Chairman Janet Y ellen, nominated to succeed him next year, he suggested companies were forced to add workers even though economic growth was slow because they cut payrolls so much during the recession. According to this line of reasoning, the additional employees depressed productivity below its trend level in the short run after it climbed an unusually elevated 5.5 percent in 2009. The trouble with Bernanke’s argument is that it looks “a little past its sell-by date” the longer productivity stays low, Feroli said. Alan Blinder, who co-wrote a book with Y ellen and is himself a former Fed vice chairman, says he’s concerned. “Taking the Alfred E. Neuman view, what we’re experiencing is a give-back of the very surprising productivity gains” seen during the recession, he said, referring to the Mad Magazine character famous for saying “What, me worry?” Productivity Puzzle Blinder, now a professor at Princeton University in New Jersey, said he’s 65 percent convinced this is what’s going on. “The other 35 percent of me is puzzled by how low productivity has been and worried it might continue.” Former Treasury Secretary Lawrence Summers has theorized the U.S. might be stuck in a “secular stagnation” that even zero-percent interest rates can’t solve. The lesson from the crisis is “it’s not over until it is over, and that is surely not right now,” he said during a Nov. 8 panel discussion at the International Monetary Fund in Washington. Summers, who dropped out of the race to succeed Bernanke in September, said “there is really no evidence” that growth is returning to previous levels. Bernanke, who appeared on the same panel, called the comments “fascinating.” To contact the reporter on this story: Rich Miller in Washington at [email protected] To contact the editor responsible for this story: Chris Wellisz at [email protected] ®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED. 3. VARIABLES DE NORMALISATION FT - S&P downgrades Netherlands' credit rating Home Africa World Asia-Pacific Companies Europe Markets Latin America & Caribbean Global Economy Lex Middle East & North Africa UK Comment US & Canada Management Life & Arts The World Blog Tools Last updated: November 29, 2013 9:36 am S&P downgrades Netherlands’ credit rating By James Fontanella-Khan in Brussels and John Aglionby in London The Netherlands has become the latest eurozone member to be stripped of its triple A credit rating by Standard & Poor’s, the credit rating agency, which cited weakening growth prospects for its decision to downgrade the country. ©Getty “The downgrade reflects our opinion that the Netherlands’ growth prospects are now weaker than we had previously anticipated, and the real GDP per capita trend growth rate is persistently lower than that of peers,” said S&P in a statement. Jeroen Dijsselbloem, the Dutch finance minister, said that S&P’s downgrade to double A plus was disappointing given that the Netherlands has recently emerged from a yearlong recession. This month France also suffered a downgrade by S&P, when it was cut from double A plus to double A minus two years after losing its triple A rating. Of the 17 members of the single currency bloc, only Germany, Finland and Luxembourg still hold the highest rating from S&P. There was little reaction to the downgrade in the bond markets; the yield on the Dutch 10-year bond was barely changed at 2.03 per cent in early trading on Friday. “There was no knee jerk reaction from the markets as they had already factored in that the Dutch economy was not worth a triple A rating,” said Nick Kounis, economist at ABN Amro. The Netherlands, the eurozone’s fifth-largest economy, has been suffering from the bursting of a housing bubble, rising unemployment and weak consumer spending. The country’s gross domestic product increased 0.1 per cent in the third quarter but shrank 0.6 per cent compared with the same period a year ago. “We do not anticipate that real economic output will surpass 2008 levels before 2017, and believe that the strong contribution of net exports to growth has not been enough to offset a weak domestic economy,” said S&P. The economy is expected to contract 1 per cent this year, according to the European Commission forecast, more than double the projected eurozone contraction. Mr Dijsselbloem accepted the downgrade, but was confident that the economy was starting to improve. FT Video No risk of Dutch debt crisis “We’re a country where we have a strong structural base but we have a number of issues to deal with,” he told CNBC. “This confirms the need to push forward with some of the reforms.” He added that the government was making the labour market “more flexible” and the pension system “more sustainable”, and helping stimulate the housing market. He also pointed to a slight recovery in household spending, which accounts for two-thirds of the country’s economic output, according to official data released on Thursday. Sep 2013: Some US hedge fund managers fear the Netherlands will be the eurozone’s next trouble spot. Kempen Capital Management’s Lars Dijkstra explains why a sovereign debt crisis is unlikely The Dutch economy is expected to start growing in 2014 at 0.2 per cent, according to the commission. Economists expect sustained growth of above 1 per cent to return in 2016. “Despite the many difficulties it faces the Dutch economy remains one of the most competitive in the eurozone,” said Mr Kounis at ABN Amro. The other two major rating agencies, Moody’s and Fitch, recently confirmed their triple A ratings for the Netherlands. The unemployment rate has improved slightly since hitting 9 per cent earlier this year. In October, 8.3 per cent of the working population were without a job, compared with 5.4 per cent in December 2011. Property prices have been falling since 2009, and slipped a further 4 per cent in October year-on-year. Meanwhile, Spain, which last month emerged from a two-year recession, had its outlook upgraded by S&P from “negative” to “stable”, suggesting that a further downgrade in the next 18-24 months was unlikely for the triple B minus rated country. The agency also upgraded the long-term credit rating of Cyprus from triple C plus to B minus, thanks to receding risks to the country’s ability to service its debts. Additional reporting by Josh Noble in Hong Kong Current S&P rating Current S&P credit outlook Moody's rating Moody's outlook United Kingdom AAA Negative Aa1 Stable Spain BBB- Negative Baa3 Negative BB Negative Ba3 Negative Country Portugal Netherlands AA+ Stable Aaa Negative Italy BBB Negative Baa2 Negative Ireland BBB+ Positive Ba1 Stable Greece B- Stable C No outlook AAA Stable Aaa Negative AA Stable Aa1 Negative Germany France Printed from: http://www.ft.com/cms/s/0/bc093146-58bc-11e3-a7cb-00144feabdc0.html Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others. © THE FINANCIAL TIMES LTD 2013 FT and ‘Financial Times’ are trademarks of The Financial Times Ltd.
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