Lessons from the European sovereign debt crisis

Transcription

1 Lessons from the European sovereign debt crisis BIS CEMLA Roundtable Fiscal policy, public debt management and government bond market: issues for central banks Mexico City, November 2012 Jose Luis Escrivá Restricted

2 Contents The dynamics of the crisis Are there lessons for Latin America? Restricted

3 Dynamics of the crisis: a vicious circle compounded by lack of action and disordered measures Inappropriate responses at national level in the absence of European-wide instruments 2 1 Failure of European fiscal rules 3 Shortcomings in the architecture of the existing monetary union PT Peripheral countries IT Low potential growth with rigid labour and product markets Restricted

4 Negative feedback loops intensified this vicious circle State aid 1 2 Public debt purchases 3 Lack of pan- European policies Uncertainty PT Peripheral countries IT Restricted

5 Negative feedback loops intensified this vicious circle PT Peripheral countries IT Restricted

6 Actions to break up these negative loops Banking union. 2 1 Reinforcement of the SGP (Six-Pack, Fiscal Compact). ESM. First steps towards fiscal union and, potentially, Eurobonds. PT Peripheral countries 3 European Commission growth initiative Troika programs IT Restricted

7 Are there lessons for Latin America? Though a major lesson is that the roots and dynamics of the Latin America debt crises of the 80 s and 90 s can be extended to more developed economies. And unfortunately Europe might have not sufficiently grasped the lessons from these previous crises. The European debt crisis contains a number of interesting developments from which some lessons can be drawn. Restricted 7

8 1. Overestimation of fiscal revenues In economies experiencing long-lasting economic booms, windfall revenues associated to asset price bubbles and certain features of the growth model can be mistakenly taken as permanent. Fiscal revenues In percentage of GDP Maximum (year) Ireland 37.3 (2006) Spain 41.1 (2007) Source: European Commission Note: In spite of significant tax increases over this period. How large are the windfall revenues in Latin America associated to protracted price commodity booms? Restricted 8

9 2. Risk of excessive reliance on structural deficit indicators Real-time cyclically adjusted fiscal indicators can be misleading. They are not a substitute for a comprehensive examination of fiscal vulnerabilities and broad and prospective analyses of the various factors impinging on fiscal positions. Cyclically adjusted fiscal balance for 2007 In percentage of GDP as estimated in 2008 as estimated in 2012 Ireland Spain Source: European Commission estimates based on production functions. Restricted 9

10 3. Loopholes in fiscal discipline frameworks In the face of a severe crisis, weaknesses in rules for fiscal discipline tend to emerge. The robustness of the institutional frameworks can be overestimated. Examples of vulnerability: regional /local governments, public enterprises, contingent liabilities associated to bank rescue programs, large pockets of informal economy Discretionary fiscal measures should be confined to some very few specific policies. Restricted 10

11 4. Avoid losing market confidence Market sentiment can change very rapidly shifting from shortsighted approaches to very acute forward-lookingness. Potential vulnerabilities and contingencies can be very highly weighed. Against this background, transparency and clarity regarding the fiscal stance and the presentation of current and prospective policies are of paramount importance. Rating agencies remain important Restricted 11

12 5. Avoid overburdening fiscal policy Countries without debt or deficit problems at the beginning of the crisis have complicated a great deal their budgetary positions by overburdening fiscal policies with multiple objectives: restoring financial stability and clearing up of ailing banks: more private sector involvement should be considered. using of discretionary fiscal policies as a bad substitute for structural reforms. excessive social protection against the inability to convey the need for long-term fiscal sustainability of public finances. Restricted 12

13 6. Some lessons for debt management When frictions in the debt market arise, remaining in the primary market across the whole maturity spectrum may pay off. Work in tandem with the market makers to mitigate illiquidity in domestic debt markets. Exacerbation of home bias and market fragmentation could be very challenging. Active search for new investor bases can be rewarded. Restricted 13

14 Lessons from the European sovereign debt crisis BIS CEMLA Roundtable Fiscal policy, public debt management and government bond market: issues for central banks Mexico City, November 2012 Jose Luis Escrivá Restricted