FINANCIAL MARKETS AND EUROZONE CRISIS GENERAL OVERVIEW MARCELLO MINENNA
A SINGLE CURRENCY, A SINGLE CURVE Trend of the 10 year interest rates over the period 1993 2007 Choice of countries participating in the Euro Introduction of Euro Entry of Greece into the Euro Greece Portugal Ireland Italy Spain France Germany 2
A SINGLE CURRENCY, A SINGLE CURVE 1,00 Correlation between economic cycles of Germany and eurozone countries Period 1997 2006 0,80 0,60 0,40 0,20 0,00 0,20 97 2001 2002 2006 3
A SINGLE CURRENCY, A SINGLE CURVE Correlation between regional and aggregate (national or UE) employment growth 1996 2000 1 0,8 0,6 0,4 0,2 0 0,2 0,4 0,6 0,8 Provence Provenza (France) (Francia) Bavaria Baviera (Germany) (Germania) Lombardy Lombardia (Italy) (Italia) Catalonia Catalogna (Spain) (Spagna) Nazionale National UE 4
A SINGLE CURRENCY, A SINGLE CURVE Correlation between regional and aggregate (national or UE) employment growth 2001 2006 1 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 Provence Provenza (France) (Francia) Bavaria Baviera (Germany) (Germania) Lombardy Lombardia (Italy) (Italia) Catalonia Catalogna (Spain) (Spagna) Nazionale National UE 5
A SINGLE CURRENCY, A SINGLE CURVE CONVERGENCE TRADE STRATEGY January 1996 Italy issues 2 years BTP with an 8% yield issue price 100 Germany issues 2 years BUND with a 2,5% yield issue price 100 January 1998 Italy issues 2 years BTP with a 5% yield issue price 100 Germany issues 2 years BUND with a 2,7% yield issue price 100 Forward purchase 2 years BTP 8% Forward sell 2 years BUND 2,5% Recieve 2 years BTP 8% Sell 2 years BTP 8% (+106 ) Buy 2 years BUND 2,5% ( 99 ) Deliver 2 years BUND 2,5% Net cashflows = 0 Net cashflows = + 7 6
A SINGLE CURRENCY, A SINGLE CURVE Collateral Discrimination before the crisis (1999 2007) REPO MARKET SIDE ECB Banks give government bonds as collateral on repo market to obtain loans ECB SIDE Banks Banks provide funding Banks AAA A- BBB+ BBB- The ECB accepts all eurozone bonds at 100% of face value The ECB applies the same 5% haircut on all securities in the Eurozone below A The interbank market applies the same haircut All EU sovereign bonds are considered investment grade (above the BBB) and therefore NOT DISCRIMINATED
IMPLICATIONS OF THE FUNCTIONING OF THE EUROPEAN FINANCIAL SYSTEM Public Debt disintermediation by the retail investors 600.000 500.000 Bank issued bonds held by households Obbligazioni bancarie in mano alle famiglie Sovereign bonds held by households Titoli di Stato in mano alle famiglie 400.000 300.000 200.000 100.000 01/12/1997 01/06/1999 01/12/2000 01/06/2002 01/12/2003 01/06/2005 01/12/2006 01/06/2008 01/12/2009 01/06/2011 8
Average inflation in the Euro countries 1999 2007 4,0% 3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% 9 Germany Austria Finland France Belgium Italy Luxembourg Nederland Spain Portugal Greece Ireland IMPLICATIONS OF THE FUNCTIONING OF THE EUROPEAN FINANCIAL SYSTEM
IMPLICATIONS OF THE FUNCTIONING OF THE EUROPEAN FINANCIAL SYSTEM Real foreign exchange rate in the Eurozone in the pre crisis period (1999 2007) 15% 10% 5% 0% 5% 10% 15% Germania Austria Francia Finlandia Belgio Irlanda Italia Spagna Grecia Olanda Portogallo Germany Austria France Finland Belgium Ireland Italy Spain Greece Nederland Portugal 10
IMPLICATIONS OF THE FUNCTIONING OF THE EUROPEAN FINANCIAL SYSTEM Percentage of Sovereign Debt held by foreign investors 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Germania Francia Italia Spagna Grecia Portogallo Irlanda Germany France Italy Spain Greece Portugal Ireland 2000 2007 11
BEGINNING OF THE CRISIS Collateral Discrimination during the crisis REPO MARKET SIDE ECB Banks give government bonds as collateral on repo market to obtain loans ECB SIDE Banks Banks provide funding Banks AAA A- BBB+ BBB- ECB applies different haircuts on government bonds depending on rating and maturity e.g. haircut on fixed coupon: Rating Maturity 3 5 7 10 AAA / A 2,5% 4,0% BBB+ / BBB 7,5% 9,0% The interbank market applies different haircuts e.g. haircut on fixed coupon: Country Maturity 3 5 7 10 Germania 1,25% 2,5% Spagna 3,5% 7,75% EU sovereign bonds are considered DIFFERENT and therefore DISCRIMINATED
BEGINNING OF THE CRISIS Percentage of Sovereign Debt held by foreign investors 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Germania Francia Italia Spagna Grecia Portogallo Irlanda Germany France Italy Spain Greece Portugal Ireland 2007 2011 13
BEGINNING OF THE CRISIS 100% Banks exposure on national debt % Titoli di stato nazionali sul totale dell'esposizione sovereign nell'attivo bancario % of homecountry bonds wrt total exposure on sovereign bond 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% PORTOGALLO Portugal ITALIA Italy SPAGNA Spain Greece GRECIA 14
BEGINNING OF THE CRISIS Trend of the 10 year interest rates over the period 1993 2012 Choice of countries participating in the Euro Introduction of Euro Entry of Greece into the Euro Greek debt crisis explosion Greece Portugal Lehman Brothers Bankruptcy Ireland Italy Spain France Germany 15
BEGINNING OF THE CRISIS Total Finantial Activities/GDP 20 15 10 5 0 Italy Italia Germany Germania Spagna Spain USA Portogallo Portugal Giappone Japan Danimarca Denmark France Francia Regno U.K Unito Nederland Olanda 16
BEGINNING OF THE CRISIS Lira/Mark 1400 1300 Exchange rate Italian Lira/German Mark; Sovereign bond spread and Sovereign CDS spread Period 1993 2012 Tasso Exchange di Cambio rate Lira/Marco Lira/Mark Govt Spread (BTP Bund) CDS Spread (IT DE) 14 12 6 4 % CDS 1200 1100 10 2 1000 8 0 900 800 700 6 4 % BTP Bund 600 500 2 400 0 17
THE COLLATERAL DISCRIMINATION AS AN ACCELERATOR OF THE CRISIS Correlation between Countries and Banks: the Italian case INCREASE OF THE CORRELATION 18
THE COLLATERAL DISCRIMINATION AS AN ACCELERATOR OF THE CRISIS Amount of collateral available to the banking systems December 2011 1.075 995 896 574 314 242 174 141 122 268 47 24 19
THE COLLATERAL DISCRIMINATION AS AN ACCELERATOR OF THE CRISIS Amount of collateral available to the banking systems VS aids granted by the ECB December 2011 553 273 326 343 343 193 247 84 108 59 49 33 28 52 19 Italia Spagna Irlanda Portogallo Grecia Titoli governativi Titoli non governativi Aiuti concessi dalla BCE Sovereign bonds Non Sovereign bonds Aids granted by ECB 20
Percentage utilization of financial assets as collateral on the repo markets by issuer s nazionality (june 2012) 25% 20% 15% 10% 5% 0% Germania Regno Unito Francia Italia Eurozona (altri) Spagna Belgio USA Danimarca Giappone Germany UK France Italy UE (others) Spain Belgium USA Denmark Japan 21
600 500 400 Spread BTP BUND 300 200 100 0 31/08/2012 30/06/2012 Focus on Italy Trend of the BTP BUND Spread vs implied default probabilities 0,45 0,4 0,35 0,3 21/12/2011; first LTRO; PD: 29,87% 0,25 29/2/2012; second LTRO; 0,2 PD: 23,99% 0,15 0,1 0,05 0 30/04/2012 31/12/2007 29/02/2008 30/04/2008 30/06/2008 31/08/2008 31/10/2008 31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009 31/12/2009 28/02/2010 30/04/2010 30/06/2010 31/08/2010 31/10/2010 31/12/2010 28/02/2011 30/04/2011 30/06/2011 31/08/2011 31/10/2011 31/12/2011 29/02/2012 10/11/2011; Greece Referendum ; PD: 33,71% 3/1/2011; BCE increases interest rates; PD: 16,55% 3/1/2011; BCE collateral discrimination; PD: 13,07% 15/9/2008; Lehman Brothers Bankruptcy; PD: 5,63% 22
Focus on Italy 700.000 600.000 500.000 Management of Italian public debt 31/12/09; Debt Stock Stock: debito: 1.762 1.762 mld mld 31/12/10; Debt Stock Stock: debito: 1.841 1.841 mld mld 31/12/11; Debt Stock Stock: debito: 1.897 1.897 mld mld 400.000 300.000 200.000 100.000 <1 1 5 5 10 10 20 >20 maturity Average monthly yield 7,0 6,5 6,0 5,5 5,0 4,5 4,0 3,5 13000 12000 11000 10000 9000 8000 7000 6000 5000 Amount placed 3,0 gen mar mag lug set nov gen mar mag lug set nov gen mar mag lug set nov gen mar mag lug set nov gen mar mag lug 2008 2009 2010 2011 2012 Titoli Short a breve term (<1Y) scadenza (<1Y) Titoli Medium Long a medio lungo term (>1Y) Rendimento 10 y average medio yield10y 4000 23