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Banque Nationale De Belgique Sa — Investor Presentation (March 2014)
56 slides from Banque Nationale De Belgique Sa's investor presentation, Mar 31, 2014
Slide 1: The Euro Area Crisis: Politics over Economics
The Euro Area Crisis: Politics over Economics Athanasios Orphanides MIT Brussels, 31 March 2014 1
Slide 2: GDP per capita in the US and the euro area
GDP per capita in the US and the euro area 105 105 100 100 Index 2007Q4=100 95 95 90 90 85 85 1999 2001 2003 2005 2007 2009 2011 2013 2015 United States Euro Area 2
Slide 3: The disintegration of the euro area economy
The disintegration of the euro area economy 110 110 105 105 100 100 Index 2007Q4=100 95 95 90 90 85 85 80 80 1999 2001 2003 2005 2007 2009 2011 2013 2015 Germany France Italy Spain GDP per capita in four largest member states 3
Slide 4: The disintegration of the euro area economy
The disintegration of the euro area economy 30 30 25 25 20 20 Percent 15 15 10 10 5 5 0 0 1999 2001 2003 2005 2007 2009 2011 2013 Germany France Italy Spain Unemployment rate in four largest member states 4
Slide 5: A lost generation in the making
A lost generation in the making 60 60 55 55 50 50 45 45 40 40 35 35 Percent 30 30 25 25 20 20 15 15 10 10 5 5 0 0 1999 2001 2003 2005 2007 2009 2011 2013 Germany France Italy Spain Youth unemployment rate (age 25 and under) 5
Slide 6: The disintegration of euro area sovereign markets
The disintegration of euro area sovereign markets 8 8 6 6 Percent 4 4 2 2 0 0 2007 2008 2009 2010 2011 2012 2013 2014 Germany France Italy Spain I Yields on two-year sovereign debt 6
Slide 7: The disintegration of the credit market
The disintegration of the credit market 7 7 6 6 5 5 Percent 4 4 3 3 2 2 2007 2008 2009 2010 2011 2012 2013 2014 Germany France Italy Spain I Lending rates to corporations 7
Slide 8: Why is the euro project crashing to earth?
Why is the euro project crashing to earth? I Is the problem in Europe a “fiscal” problem, a “competitiveness” problem, a “banking” problem, etc? I Alternatively, are these symptoms of a deeper flaw that cannot be solved with technical arguments? I The trigger for the crisis was the need to finance a
Slide 9: Crisis mismanagement: Two examples
Crisis mismanagement: Two examples I October 18, 2010, Deauville: Decision to introduce credit risk in what used to be considered “safe” government debt. I March 16, 2013, Brussels: Decision to introduce credit risk in what used to be considered “safe” bank deposits. 9
Slide 10: Unique and exceptional blunders?
Unique and exceptional blunders? I Why the haphazard decisions? I One explanation is that the blunders we have repeatedly observed during the crisis reflect incompetence. If so, this could be corrected with more enlightened advisers. I Another explanation is that these blunders are a predictable man
Slide 11: How could things get so bad?
How could things get so bad? I The euro was incomplete by design. I No crisis management mechanism in place. I The success of the euro rested on the belief or hope that if and when a crisis erupted governments would work together towards completing the project. I This belief proved misplaced. 11
Slide 12: Why the failure?
Why the failure? I Every crisis generates losses. I Economic cost I Political cost I Key question: Who pays? I Proper crisis management minimizes the economic cost. I This requires political leadership to advance the common good and political courage to accept political cost. I Unfortunately, this p
Slide 13: Why the failure?
Why the failure? I Europe is not a federal state—there is no government with either the incentives or the power to enforce solutions for the common good. I Solutions require unanimous agreement by governments. I Governments of member states bound to please their own electorate and serve local intere
Slide 14: Who failed Europe?
Who failed Europe? I Key decision makers exhibited neither political leadership nor political courage. I Rather than work towards containing total losses, politics led governments to focus on shifting losses to others. I The result was massive destruction in some member states and a considerably hig
Slide 15: Some examples of shifting losses
Some examples of shifting losses I Irish bank debt in 2010. Who was exposed? Who gained from forcing the Irish government to accept all losses? I PSI concept introduction. Who benefited and who lost by injecting credit risk in euro area sovereign debt? I Greek debt in 2010. Who was exposed? Who was
Slide 16: The Deauville blunder: October 2010
The Deauville blunder: 18 October 2010 I Agreement between French and German government to introduce the Private Sector Involvement (PSI) doctrine. I Whenever a euro area member state faced liquidity pressures (not necessarily solvency concerns), the imposition of losses on private creditors would b
Slide 17: Deauville implications
Deauville implications I The introduction of credit risk in euro erea sovereign debt raised the cost of financing for euro area governments perceived to be relatively weak. I The first casualty was Ireland that lost access to markets within a few weeks. Portugal followed a few months later. I The PS
Slide 18: The Cyprus blunder
The Cyprus blunder I Cyprus: 0.2% of the euro area, entered euro in 2008 I Stable currency and finances before euro entry. I Vulnerability: Large banking system. I Problem: Communist government was in power for five years right after euro entry: March 2008—February 2013. I The crisis in Cyprus start
Slide 19: Could one see the Cyprus crisis coming?
Could one see the Cyprus crisis coming? 2000 2000 1750 1750 1500 1500 1250 1250 Basis Points 1000 1000 750 750 500 500 250 250 0 0 2010 2011 2012 2013 Spain Greece Cyprus Ireland Portugal I Five-year CDS on sovereign: 1 Jan 2010 – 28 Feb 2013. 19
Slide 20: The delay that made Cyprus unique
The delay that made Cyprus unique. 2000 2000 1750 1750 1500 1500 1250 1250 Basis Points 1000 1000 750 750 500 500 250 250 0 0 2010 2011 2012 2013 Spain Greece Cyprus Ireland Portugal I Markers show when assistance was sought and agreed. 20
Slide 21: Warnings?
Warnings? I Communist government started overspending as soon as it took power in 2008. I Euro area crisis made Cyprus vulnerable to unsustainable increases in public expenditures as a result of its large banking system and connectedness to Greece. I Warnings regarding consequences of fiscal misteps
Slide 22: A warning from the ECB, December 2010
A warning from the ECB, 15 December 2010 “In light of recent market concerns about public debt sustainability, it is more important than ever that every country benefiting from the common currency takes prompt and effective steps to ensure that its public finances are on a sound footing. Experience
Slide 23: Anybody listening?
Anybody listening? I Not heeding ECB warnings was particularly costly. Through its actions, the ECB had demonstrated its willingness to provide support and diffuse stress situations. I By 2010, euro area sovereign markets were disintegrating. I During 2010, the ECB had already started purchases of G
Slide 24: An exchange of messages
An “exchange of messages” “Dear Prime Minister, The Governing Council of the European Central Bank discussed on 4 August the situation in Italy’s government bond markets. The Governing Council considers that pressing action by the Italian authorities is essential to restore the confidence of investo
Slide 25: What did the SMP buy?
What did the SMP buy? ECB: Details on securities holdings acquired under the Securities Markets Programme PRESS RELEASE 21 February 2013 - Details on securities holdings acquired under the Securities Markets Programme The Governing Council of the European Central Bank (ECB) decided today to publish
Slide 26: What did the SMP NOT buy?
What did the SMP NOT buy? SMP countries (ECB purchases of sovereign bonds) I Greece I Ireland I Portugal I Italy I Spain Program countries I Greece I Ireland I Portugal I Cyprus I Spain 26
Slide 27: How did the crisis start in Cyprus?
How did the crisis start in Cyprus? I In May 2011, the government lost access to markets. I In July 2011, an explosion destroyed the island’s largest power station. Over half of the island’s electricity was lost and economy was thrown into recession. I The government decided to avoid dealing with fi
Slide 28: The role of the central bank in the election
The role of the central bank in the election I Started investigations against banks, providing material for selective defamatory leaks that appeared in press and were used by the communist party as part of their election campaign. I Started describing the banking model in Cyprus as “casino banking.”
Slide 29: The February 2013 election in Cyprus
The February 2013 election in Cyprus I The coordinated campaign succeeded in creating the image that the banking system was so severely undercapitalized that if the government provided the capital, as was done in previous cases, then, according to standard IMF analysis, government debt could be deem
Slide 30: The September 2013 election in Germany
The September 2013 election in Germany I The delay in finalizing a program for Cyprus pushed it into the German election cycle. I How could elections in any single state matter for a program in another state? I Because each state has veto power that can be exploited whenever another euro area member
Slide 31: Why did the German elections matter so much?
Why did the German elections matter so much? I The Chancellor’s party (CDU) has needed support from its main opposition party (SPD) to pass legislation on Europe. I Support of earlier programs was secured by SPD. I Getting closer to elections, the SPD signaled a tougher stance to create political co
Slide 32: Headlines in Germany
Headlines in Germany 5/8/13 Druckversion - Bailing Out Oligarchs: EU Aid for Cyprus A Political Minefield for Merkel - SPIEGEL ONLINE - News - International 11/05/2012 06:41 PM Bailing Out Oligarchs EU Aid for Cyprus A Political Minefield for Merkel By Markus Dettmer and Christian Reiermann The EU i
Slide 33: The facts on money laundering?
The facts on money laundering? Compliance with 49 FATF recommendations Compliant Largely Partial Non % Cyprus 12 28 9 0 82 Germany 5 24 15 5 59 Netherlands 6 22 20 1 57 Luxemburg 1 9 30 9 20 Entries (except last column) show the number of FATF recommendation where a country is deemed as compliant, l
Slide 34: A solution for the German government
A solution for the German government I Any solution had to be structured so as to be an effective response to the SPD arguments and avoid political costs. I This could be achieved if losses were imposed on depositors (preferably “Russian oligarchs”). I Ideally, for the German government, a solution
Slide 35: The domination of local politics
The domination of local politics ”We don’t like this business model and we hope it is not successful ... In the case of Cyprus we have leverage that we don’t have with other tax havens.” Wolfgang Schaeuble, April 5, 2013 (Reuters) 35
Slide 36: The domination of local politics
The domination of local politics “[A]nyone having their money in Cypriot banks must contribute in the Cypriot bailout. That way those responsible will contribute in it, not only the taxpayers of other countries, and that is what’s right.” Angela Merkel, March 16, 2013 (remarks at a German election r
Slide 37: The eurogroup blunder on March 16, 2013
The eurogroup blunder on March 16, 2013 I Eurogroup decided to impose haircut on all deposits, insured and uninsured, in all banks regardless of capitalization, to replenish capital and solve problem. I The proposal was contrary to any known framework and violated basic EU principles and was rejecte
Slide 38: Consequences?
Consequences? I Much like the Deauville blunder, the solution the German government imposed on Cyprus was risky for the euro area. I The introduction of credit risk in deposits added to pressures on banks in the periphery. I But the strategy paid off handsomely for the German Chancellor in the Septe
Slide 39: Ex post rationalization
Ex post rationalization Following the decisions in March, there have been attempts to rationalize the destruction of the banking system of Cyprus, e.g.: “The Cypriot economy evolved towards a rather unbalanced business model with an inordinate weight for the financial industry.” Fact checking? 39
Slide 40: External assessment before EU Council decisions
External assessment before EU Council decisions “The Cypriot banking system has weathered the economic difficulties well and appears to be in sound overall condition. It has benefited from reliance on deposits rather than less stable sources of financing, conservative lending practices, close attent
Slide 41: External assessment after EU Council decisions
External assessment after EU Council decisions “The large banking sector, with assets totaling over 8 times GDP by the broadest measure, and with significant exposure to Greece, is a significant vulnerability. Banks face significant capital needs to reflect mark to market valuations on their soverei
Slide 42: Claims regarding the size of the banking system
Claims regarding the size of the banking system “Cypriot banks attracted large inflows of foreign deposits. They expanded their balance sheets dramatically over recent years, both domestically and externally.” “The problems of Cyprus built up over many years. At their origin was an oversized banking
Slide 43: Facts regarding the size of the banking system
Facts regarding the size of the banking system Compare size of banking system as a multiple of GDP when Cyprus was admitted in euro area (June 2007) and when Cyprus asked for help (June 2012). Bank assets/GDP ratio (in percent) Total Domestic June 2007 646 460 June 2012 669 463 43
Slide 44: Claims regarding deposit rates
Claims regarding deposit rates “The problems of Cyprus built up over many years. At their origin was an oversized banking sector that thrived on attracting foreign deposits with very favourable conditions.” “Banks became increasingly exposed to funding vulnerabilities. They tried to attract deposits
Slide 45: Facts regarding deposit rates
Facts regarding deposit rates The average for the euro area is not the relevant comparative metric for deposit rates in Cyprus because the euro area has not been functioning as a unified economy during the crisis. A relevant comparison for Cyprus would be with Greece, an economy 10 times as large an
Slide 46: A big heist?
A big heist? BANKRAUB AUF _| 2YPRIOTISCH: 46
Slide 47: Shifting losses: The tale of three banks
Shifting losses: The tale of three banks I Piraeus Bank I Marfin-Laiki Bank I Bank of Cyprus 47
Slide 48: Effect of Exposure to Greek Sovereign
Effect of Exposure to Greek Sovereign End 2010 CT1 Write-off CT1 Exposure Capital Ratio Capital Ratio (1) (2) (3) (4) (5) Piraeus 8.221 3.039 8.0 −1.072 −2.8 Marfin-Laiki 3.407 2.015 7.2 0.312 1.1 Bank of Cyprus 2.407 2.134 8.1 0.931 3.5 Ratios in percent. Exposures and capital levels in billion eur
Slide 49: Outcome of March 2013 decisions
Outcome of March 2013 decisions I A transfer of assets from Marfin-Laiki and Bank of Cyprus to Piraeus facilitated the recapitalization of Piraeus. I Following the transfer of assets Marfin-Laiki and Bank of Cyprus effectively became insolvent. I Marfin-Laiki was merged with Bank of Cyprus. As a res
Slide 50: Piraeus Bank financial statements information, Q1 2013
PIRAEUS BANK S.A. General commercial registry number 225501000 Companies registration number 6065/06/B/86/04 Head Office: 4, Amerikis st., 105 64, Athens, Greece FINANCIAL STATEMENTS INFORMATION FOR THE PERIOD from 1st January 2013 to 31st March 2013 (according to the Rule 4/507/28.04.2009 of the Ca
Slide 51: Piraeus Bank Financial Statement: 2013Q1
Piraeus Bank Financial Statement: 2013Q1 2012Q4 2013Q1 Assets 63.022 78.991 Equity −2.744 0.915 All entries in billion euro. Note in financial statement explains that the results include 3.414 billion euro “negative goodwill due to the acquisition of assets and liabilities of Cypriot banks’ network
Slide 52: The Role of European Institutions?
The Role of European Institutions? 13 ECB: Governing Council decision on Emergency Liquidity Assistance requested by the Central Bank of Cyprus PRESS RELEASE 21 March 2013 - Governing Council decision on Emergency Liquidity Assistance requested by the Central Bank of Cyprus The Governing Council of
Slide 53: The Role of European Institutions?
The Role of European Institutions? “The Commission notes also that the bail-in of uninsured deposits in the two major banks constitutes a unilateral measure of the Cypriot authorities that does not form part of the MoU that was subsequently concluded.” Olli Rehn answer to European Parliament Inquiry
Slide 54: The Role of European Institutions?
The Role of European Institutions? “He also said the pressure exerted on him by Brussels had been unprecedented. To a remark by one of the panel judges that it was ‘like a knife to the throat,’ Anastasiades said it was more like ‘a gun to the head’.” President Anastasiades testimony to investigation
Slide 55: Is a solution to the euro area crisis feasible?
Is a solution to the euro area crisis feasible? I Can a solution to the euro area crisis pass the political feasibility test? I Unlikely without fundamental political reform in Europe. I Is political reform presently feasible? I Unlikely with the current configuration of leaders and governments. I D
Slide 56: Trust in the EU and its institutions
Trust in the EU and its institutions 70 70 60 60 Percent 50 50 40 40 30 30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 European Union European Commission European Central Bank Fraction who “tend to trust” the institution among those expressing an opinion. 56
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