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The Global Financial Crisis: Why It Happened, and Options for National and International Policy Change A comparative overview of the crisis and macro-economic policy responses so far. Trevor Alleyne. Western Hemisphere Department International Monetary Fund Barbados January 25, 2011. - PowerPoint PPT Presentation
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The Global Financial Crisis: Why It Happened, and Options for National and International Policy Change
A comparative overview of the crisis and macro-economic policy responses so far
Western Hemisphere DepartmentInternational Monetary Fund
BarbadosJanuary 25, 2011
Trevor Alleyne
The world is recovering from the great recession, but huge challenges remain
The impact of the crisis
How the crisis happened
Why this recession is different
The causes of the crisis
Policies to sustain the recovery
Lessons from the crisis
Main challenges faced by the Caribbean
2
The Crisis—Impact on GrowthGlobal growth fell sharply during the crisis everywhere in the world
Emerging anddeveloping economies
World
Advanced economies
3
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
2006 07 08 09 10 11
IMF Forecasts
3
Source: IMF WEO (October 2010).
Global GDP Growth(percent, quarter-over-quarter, annualized)
The Crisis—Impact on the World
4
Wiped out over $2 trillion in bank assets Plunged most of the world into a global recession
Over 30 million more people became unemployed (ILO)
30-50 thousand more babies may die in Africa in 2010 (World Bank)
About 64 million more people have fallen into extreme poverty by 2010 (World Bank)
5
The Crisis—Impact on the World
Advanced Economies
Emerging and Developing Countries
World
4.50
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
2006 2007 2008 2009
Onset of the crisis
6
The Crisis—Impact on UnemploymentUnemployment rose sharply in developed and developing countries
Source: IMF WEO (April 2010).
Global Unemployment Rate(percent)
Caribbean: Real GDP Growth 1/(annual percentage change)
Source: IMF WEO (October 2010).1/ Caribbean countries include Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
2006 2007 2008 2009 2010-15
-10
-5
0
5
10
15
20
-15
-10
-5
0
5
10
15
20
7
The Crisis—Impact on the CaribbeanSevere recession followed by a slow recovery of growth
Caribbean: Unemployment Rate 1/(percent)
Source: IMF WEO (October 2010).1/ Caribbean countries include Bahamas, Barbados, Belize, Jamaica, Suriname, and Trinidad and Tobago. Data for ECCU countries are not available.
2006 2007 2008 2009 20100
5
10
15
20
0
5
10
15
20
8
The Crisis—Impact on the Caribbean… higher unemployment…
Public Debt 1/(percent of GDP)
Source: IMF WEO (October 2010).1/ Caribbean countries include Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
2006 2007 2008 2009 20100
50
100
150
200
250
0
50
100
150
200
250
9
The Crisis—Impact on the Caribbean… and a sharp rise of public debt/GDP ratios
Let’s look at where the crisis began…In U.S. and European banks
10
The Crisis
Lots of liquidity sloshing around
Asset bubbles
Crisis starts in advanced countries
Banking crises
Creditcrunch Recession
Wea
k re
gu
lati
on
Excess risk
Weak supervision
Advanced economies
11
Advanced economies affected
-2.5
1.2
-4.1
-5.1
-1.9
0.8-5.20.2
-1.6
-1.4
-1.3
-4.7
-2.8
-4.9
-2.6
-6.8
-4.1 Euro Area-1.9
12
Source: IMF WEO (October 2010).
(2009 growth rate)
Asset bubbles
Crisis spreads to emerging economies
Banking crises
Creditcrunch Recession
Advanced economies
Creditcrunch Recession
Emerging economies
Trade collapsed - Capital flows stopped
13
Emerging economies affected
0.9
-0.2
-1.5
0.8
9.1
5.7
4.5
-1.7
-6.5
-3.4
0.9
1.1
-1.8
-2.2-3.3
v
-4.7
-6.3
-18.0
-7.1
-14.8
1.7
-7.9
-15.1
-13.9
14
(2009 growth rate)
Source: IMF WEO (October 2010).
Asset bubbles
Low-income countries
Banking crises
Creditcrunch Recession
Advanced economies
Creditcrunch Recession
Emerging economies
RecessionLow-income economies
Trade collapsed - Capital flows stopped
15
16
Why is this recession different?
Recessions associated with financial crises are severe and recoveries from such recessions are typically slow. These features become more pronounced if in addition the recession is global.
Countercyclical policies are helpful in ending recessions and strengthening recoveries. Their effectiveness depends on the type of recession.
0 2 4 6 8
Financialcrises which
are highlysynchronized
Highlysynchronized
recessions
Financialcrises
All recessions
Output loss (percent from peak)
Duration (quarters)
Features of Recessions and Recoveries Depend on the Type of Recession…
Recessions Recoveries
0 2 4 6 8
Financialcrises which
are highlysynchronized
Highlysynchronized
recessions
Financialcrises
All recessions
Time until recovery to previous peak(quarters)Output gain after four quarters (percent fromtrough)
17
Policies Help Shorten Recessions… Fiscal Stimulus is Effective in Financial Crises…
0.0
0.2
0.4
0.6
0.8
1.0
0 1 2 3 4 5 6 7 8 9 10
Quarters
Full sample
Financial crises
Financial crises with high fiscal response
18
Probability of remaining in a recession beyond a certain number of quarters
19
In the Caribbean, high public debt/GDP ratios have weakened growth and narrowed the fiscal space
10 40 70 100 130-6
-4
-2
0
2
4
6
-6
-4
-2
0
2
4
6
-1.9
-3.0
0.5
4.5
-3.4
-2.8
-1.6
-3.5
-2.0
-0.2
-1.2
Ave
rag
e r
ea
l GD
P g
row
th,
20
09
–1
0
Public Debt, 2008 (percent of GDP)
Public Debt Burden and Real GDP Growth
Growth has been weaker in countries with higher debt levels...
JAM BHS BRB ECCU DOM TTO-4
-3
-2
-1
0
1
2
-20
-15
-10
-5
0
5
10
Change in primary deficit (percent of GDP)¹
Real primary expenditure growth minus potential GDP growth (percent, right scale)
Change in Primary Deficit and Primary Expenditure Growth, 2010
... where fiscal space remains constrained.
Why did the crisis happen?
Market discipline and regulations failed to keep up with innovation and leverage build up
Macroeconomic policies did not respond to increase in systemic risk
Leadership needed at the international level to detect and respond to risks
20
21
What can be done to foster the recovery?: A consistent policy framework
Accommodative monetary policy and continued support for banks to support credit and demand.
Repair and reform financial systems.
Medium-term fiscal consolidation plans, including to build credibility and new room for policy maneuver.
Structural reforms and exchange rate flexibility to boost domestic demand in key EM.
Employment promotion and protect the most vulnerable.
If recovery threatens to stall: (i) further monetary easing; (ii) in countries with fiscal room, allowing automatic stabilizers to play and postponing some consolidation.
22
Monetary policy needs to remain accommodative, but there are limits to its effectiveness (as long rates are very low)
-200
-100
0
100
200
300
400
500
-6
-3
0
3
6
9
12
15
Change from March, basis points, RHS
August long-term interest rates, percent, LHS
Change in Long-Term Bond Yield, 2010 1/(basis points)
AU
S
AU
T
BE
L
CA
N
CZ
E
DN
K
FIN
FR
A
DE
U
GR
C
HK
G
IRL
ISR
ITA
JPN
KO
R
NL
D
NZ
L
NO
R
PR
T
SG
P
SV
K
ES
P
SW
E
TW
N
GB
R
SV
N
US
A
1/ AUS: Australia; AUT: Austria; BEL: Belgium; CAN: Canada; CZE: Czech Republic; DNK: Denmark; FIN: Finland; FRA: France; DEU: Germany; GRC: Greece; HKG: Hong Kong SAR; ISL: Iceland; IRL: Ireland; ISR: Israel; ITA: Italy; JPN: Japan; KOR: Korea; NLD: Netherlands; NZL: New Zealand; NOR: Norway; PRT: Portugal; SGP: Singapore; SVK: Slovak Republic; SVN: Slovenia; ESP: Spain; SWE: Sweden; TWN: Taiwan Province of China; GBR: United Kingdom; USA: United States.
23
Financial sector repair and reformneed to accelerate
Recapitalize/resolve banks
Repair markets for securitized assets
Re-establish market discipline
Implement regulatory reform with a broader and more global view (broaden the regulatory perimeter and foster cross-border coordination among regulators)
24
Medium-term fiscal plans are urgently needed
Projected Change in Cyclically Adjusted Primary Balances(percent of potential GDP)
Source: FAD staff estimates.1/ In percent of GDP; distance from blue bar reflects required additional fiscal adjustment relative to 2010-13; adjustment to be sustained between 2020–30 to reduce public debt to prudent levels.2/ Structural primary balance.3/ Excluding financial sector support recorded above the line.
Ge
rma
ny
Ca
na
da
Un
ited
Sta
tes
2/
Fra
nce
Italy
Jap
an
3/
Un
ited
Kin
gd
om
Ire
lan
d
Po
rtu
ga
l
Sp
ain
Gre
ece
-5
0
5
10
15
20 Change 2013-2011Change 2011-2010Change 2010-2009Additional adjustment between 2013-2020 1/
25
Dealing with inflow surges: Exchange rate flexibility and capital controls
Fiscal and monetary stimulus policies are leading to capital inflow surges in emerging economies
Macro and prudential policies can help deal with the downsides of inflow surges (appreciation and inflation)
Macro policy space (especially exchange rate) must be exhausted before imposing capital controls
Capital controls and prudential measures should target specific risks
Prudential measures when flows intermediated through the regulated financial institutions
Capital controls when flows by-pass regulated financial institutions
26
Foster employment and protect the most vulnerable
ILO/IMF collaboration (Oslo Conference 9/2010)
The crisis will not be over until unemployment falls
Growth is essential for employment, but it is not enough
Job creation must be a priority
Specific policies are needed to protect the poor and the vulnerable (social protection floor)
Programs to subsidize short-term work and on-the-job training
Unemployment benefits
Job subsidies
27
Over the medium term, what are the main lessons for policy makers on the macroeconomic level?
Monetary policy should respond to the buildup of systemic risk (focus on macro-financial stability)
Fiscal policy should be put on a stronger footing in good times (to open up fiscal space for countercyclical fiscal stimulus in bad times)
While international capital flows are on the whole beneficial, global imbalances have to be addressed
The world is recovering from the great recession, but huge challenges remain
Unemployment
Fiscal sustainability
Sources of growth
Financial sector reform
Capital flows to emerging markets
✓
✓
✓
✓
✓28
As the Caribbean recovers from the great recession, it faces significant challenges going forward
Promoting growth- Energy and infrastructure- Human capital- Competitiveness- Diversification
Fiscal sustainability- Reducing debt-to-GDP ratios- Creating fiscal space to allow for
countercyclical policy
Financial sector- Strengthening regulations, particularly for
nonbank FI- Resolving CLICO
✓
✓
✓
Climate change✓29
30
Source: IMF WEO (October 2010).1/ Caribbean countries include Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
Caribbean: Real GDP Growth 1/(annual percentage change)
Growth is projected to be lower than in the past
1990-99 avg. 2000-02 avg. 2003-08 avg.0
1
2
3
4
5
3.1
1.9
3.8
2011 2012 2013 2014 20150
1
2
3
4
5
2.4
2.8
3.2 3.2 3.2
31
Medium-term fiscal plans are urgently needed
Caribbean: Projected Change in Cyclically Adjusted Primary Balances(percent of potential GDP)
An
tig
ua
& B
arb
.
Ba
ha
ma
s
Ba
rba
do
s
Be
lize
Do
min
ica
Gre
na
da
Gu
ya
na
Ja
ma
ica
St. K
itts
& N
evis
St. L
ucia
St. V
ince
nt &
th
e G
ren
ad
ine
s
Su
rin
am
e
Tri
nid
ad
& T
ob
ag
o
-15
-10
-5
0
5
10
15
20Change 2013-2012
Change 2011-2010
Change 2010-2009
Source: WHD staff estimates.
32
Financial Sector
Strengthening the financial sector requires
Upgrading the legislative and supervisory framework for
Commercial banks
Nonbank financial institutions
Intensifying monitoring and on-site inspections, and more frequent reporting
Consolidated supervision of conglomerates
Agreements and closer collaboration for cross-border supervision
Urgent resolution of CLICO
A transparent resolution process
Minimize fiscal costs and contingent liabilities
Thank You