The Penetration of Financial Instability in Agricultural Credit and Leveraging. Factor Markets Working Paper No. 2, September 2011

This paper describes the aggregate rural capital markets of the EU and the main differences between the markets of its member countries. The results of our study suggest that the agricultural credit markets are still quite segmented and the segments are country- rather than currency- or region specific. Financial instability in Europe is also penetrating the agricultural sector and the variation of interest rates for agricultural credit is increasing across countries. Perhaps the most dramatic signal of growing financial instability is that the financial leverage (gearing rate) of European farms rose in 2008 by almost 4 percentage points, from 14 to 18%. The 4 percentage-point annual rise was twice the 2 percentage-point rise observed during the economic recession in the late 1980s and early 1990s. The distribution of the financial leverage of agriculture across countries does not, however, reflect the distribution of country-specific risk premiums in the manner that they are observed in government bond yields. Therefore, in those countries that have the weakest financial situation in the public sector and in which the bond markets are encumbered with high country-specific risk premiums, the agricultural sector is not directly exposed to a very large risk of increasing interest rates, since it is not so highly leveraged. For example in Greek and Spanish agriculture, the financial leverage (gearing) rate is only 0.6% and 2.2% respectively, while the highest gearing rates are found elsewhere (in Denmark), reaching 50%.

Benchmarking the Financial Sector in the Southern and Eastern Mediterranean Countries and Projecting 2030 Financial Sector Scenarios. MEDPRO Technical Report No. 31/March 2013

This paper aims at devising scenarios for the development of the financial system in the southern and eastern Mediterranean countries (SEMCs), for the 2030 horizon. The results of our simulations indicate that bank credit to the private sector, meta-efficiency and stock market turnover could reach at best 108%, 78% and 121%, respectively, if the SEMCs adopt the best practices in Europe. These scenarios are much higher than those of the present levels in the region but still lower than the best performers in Europe. More specifically, we find that improving the quality of institutions, increasing per capita GDP, opening further capital account and lowering inflation are needed to enable the financial system in the region to converge with those of Europe.

Le role des politiques monétaires et la convergence macroeconomique sur le développement des systèmes financiers dans les pays du sud de la Méditerranée. = The role of monetary policies and macroeconomic convergence in the development of financial systems in south Mediterranean countries. MEDPRO Technical Report No. 12/April 2012

This MEDPRO Technical Report shows that the monetary and exchange rate policies conducted by central banks in the South Mediterranean region display apparent homogeneity in their operational frameworks, albeit with some specificities and differing degrees of advancement. While central banks state that price stability is their ultimate objective, failures to control interest rates as operational objectives of monetary policy result in monetary authorities resorting to quantitative approaches to monetary policy, meaning that monetary aggregates and credit targets are being used as intermediate targets of monetary policy. An econometric exercise limited to Maghreb countries (Algeria, Morocco, and Tunisia) has been conducted to analyse the potential scenarios of convergence and monetary policy coordination. Given the high structural heterogeneity and the slow pace of real convergence due to weak commercial integration in the Maghreb, results nevertheless show alternative dynamics in the integration of effective nominal exchange rates, as well as a complete convergence dynamic in exchange rate policies. Partial convergence of monetary policies regarding the stabilisation of inflation rates remains an open option for a transitional phase where financial integration is low.

The economic and financial crisis in Russia – background, symptoms and prospects for the future. OSW Report 02/2015

The crisis in Russia’s financial market, which started in mid-December 2014, has exposed the real scale of the economic problems that have been growing in Russia for several years. Over the course of the last year, Russia’s basic macroeconomic indicators deteriorated considerably, the confidence of its citizens in the state and in institutions in charge of economic stability declined, the government and business elites became increasingly dissatisfied with the policy direction adopted by the Kremlin, and fighting started over the shrinking resources. According to forecasts obtained from both governmental and expert communities, Russia will fall into recession in 2015. The present situation is the result of the simultaneous occurrence of three unfavourable trends: the fact that the Russian economy’s resource-based development model has reached the limits of its potential due to structural weaknesses, the dramatic decline in oil prices in the second half of 2014, and the impact of Western economic sanctions. Given the inefficiency of existing systemic mechanisms, in the coming years the Russian leadership will likely resort to ad hoc solutions such as switching to a more interventionist “manual override” mode in governing the state. In the short term, this will allow them to neutralise the most urgent problems, although an effective development policy will be impossible without a fundamental change of the political and economic system in Russia.

The effort to stabilise the financial system in Japan: an outline and the characteristics of the programme for financial revival. Bruegel Working Paper 2015/02, 18 March 2015

This Working Paper provides an overview of the Programme for Financial Revival announced in October 2002 in Japan. The programme aimed to dramatically reduce the large amount of non-performing loans that remained until the end of the 1990s. In addition to solving the problem of bad loans, the Programme for Financial Revival aimed to build a strong financial system. For this purpose, the programme comprised three pillars: 1) creation of a new framework for the financial system, 2) creation of a new framework for corporate revitalisation, 3) creation of a new framework for financial administration. The Japanese experience suggests that despite its delayed introduction, this programme may be considered successful in going some way to drastically reduce non-performing loans and stabilise the financial system. Japan’s financial problems and their resolution since the 1990s provide a number of lessons for other economies, particularly for Europe in relation to the difficulties over the euro.