OECD Seminar : 20 years after Panel 2 : Challenges and opportunities

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OECD Seminar 20 years afterPanel 2
Challenges and opportunities

• Júlia Király
• Deputy Governor, Magyar Nemzeti Bank

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This time it was not us

• The epicentre of the crisis was not in emerging
  markets
• It was originating from developed countries
• Macro imbalances (low interest rates, excess
  liquidity, housing market boom, saving
  imbalance...)
• Financial market imbalances (yield hunting and
  greedy risk appetite, originate-to-distribute
  model and subprime lending, toxic assets
  highly leveraged, structured products, high
  leverage, shadow banking system...)
• and spreading towards East through trade and
  financial markets
• Strong financial and trade integration in the CEE
  region incl. Hungary has led to fast spill-over
  of the crisis

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Strong financial and economic integration of the
CEE countries
Source EKB, Eurostat.
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Hungarys high vulnerability triggered an
avalanche
Large public debt
Fiscal alcoholism
1. Government risk
External debt
High inflation
Integrated banking system with developed
countries Overoptimistic expectations of the
households
Lending in foreign currency
150 loan to deposit ratio
2. Banking sector risk
Liberalised balance of capital
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Private sector is responsible for 2/3 of the
external debt

Source MNB.
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The currency mismatch of the private sector
amounts to 40 of the GDP
Source MNB.
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9th October 2008

• the fx swap interbank market collapsed
• the secondary government paper market collapsed
• the HUF depreciated hour by hour
• the stock exchange trade was suspended because of
  the price fall

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Response to the crisis

• Immediate remedies for the liquidity crisis
• MNB extended collaterals, LOLR in FX!, decreased
  reserve requirement
• Foreign parent banks replacing money market
  funds
• Fixing balance sheets
• Government a sizeable and structural fiscal
  adjustment - pro-cyclical effects (cut in social
  transfers, tax reshuffling VAT and real estate
  tax?, taxes on labor?)
• Households increase net saving position,
  decrease credit demand
• Companies labor market adjustment, postponing
  investments
• Banks deleverage, decrease L/D ratio and tighten
  credit conditions
• Monetary policy focus on price stability AND
  financial stability (forced tightening, slow
  easing)

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Hungarian banks withstand the shock

• Loan loss ratio is expected to triple in 2009 and
  slightly increase in 2010, while in the stress
  scenario it would be 5-6 times higher in 2010
  than in 2008
• Strong capital position is expected to be kept
  along the baseline scenario (end-2010 CAR above
  11)
• Recapitalisation needs (EUR 400-600 million for
  the whole banking system) under a severe stress
  scenario are manageable

Source MNB.
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Fast adjustment in the private and banking sector
Source MNB.
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Necessary adjustment can lead to deeper recession
and slower recovery
Source Eurostat, EC.
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The potential output can be negatively affected
by the crisis

• Productivity (TFP)
• Financing constraints disrupt daily operations
• Expenditure on innovation falls
• Sluggish reallocation between industries
• Labour input
• Long-term unemployment erodes human capital
• Capital input
• Capital accumulation slows down
• Excess capacities are scrapped
• But two country-specific factors reduce these
  negative effects
• High risk premia fall with fiscal consolidation
• Government measures boost labor market
  participation

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Financial crises reduce potential growthalthough
their long-term impact varies
Lower long-run potential growth rate (Japan)?
Full recovery in levels (Sweden)?
One-time loss in output level (Finland)?
Source Impact of the current economic and
financial crisis on potential output, European
Economy, Occasional Papers No 49
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• IMF estimations
• Growth regression
• Potential growth is 0.6-2.5 pp lower after the
  crisis
• Hungary is mostly affected through its debt burden

Source IMF Regional Outlook Europe, October
2009, Box 5
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MNB re-evaluated its projections in August
Source MNB.
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but Hungary with lower post-crisis potential
output growth is not an exception in CEE

• European Commission estimations for the CEE
  region
• Potential growth slows to 2-2.5 per cent
• No recovery to pre-crisis growth rates (contrary
  to the euro area)

Source Impact of the current economic and
financial crisis on potential output, European
Economy, Occasional Papers No 49
Note calculations for the EU-8 aggregate (BG,
CZ, EE, LT, LV, PL, RO)
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