Abstract
Inflated assets’ bubbles
remain the key to financial risks. The other risk is ignorance of markets’
inertia. It seems that financial stability encourages the economic growth, and
vice versa, economic growth is required to keep financial stability. But if
consumption does not generate enough incomes to cover capital expenditures, is
it a sign of bad luck or unconsidered actions those fail to match customers’ preferences?
The main criterion of efficient markets is equal opportunities to gather information
so that market participants were able to estimate and compare the value of
assets. However, with markets’ distortions investors take inadequate higher risks
than expected returns. Thus, are there sustainable development strategies those
allow companies to generate incomes during economic contractions and enable
investors to withstand financial shocks in the financial markets?
A brief review
of European policies
Recession in Europe undermined local
businesses and consumption. According to the Eurostat data the real GDP growth rate in European Union’s 27 countries
was -4.6% in 2009 which followed by a
positive increase of 2.1% in 2010, 1.5% in 2011 and decline of -0.3% in 2012.
The rate was projected to increase by 0.1% in 2013 and 1.6% in
2014. The biggest
rates
of economic contraction in 2012 were registered in Greece, Portugal, Cyprus, Slovenia and Italy. The recorded real GDP growth rates
amounted -6.4%, -3.2%, -2.3%, -2.3% and -2.2% respectively.
According to the data recorded in January 2013, the unemployment rate in 27
European countries comprised 10.8% with the highest rates in Spain, Croatia,
Portugal those amounted 26.2%, 18%, 17.6% respectively and the unemployment
rate of 26.4% in Greece which was registered in December of 2012. The analysis
of EU-27 household final consumption expenditure published in February 2013 at
the Eurostat’s Statistics in focus revealed that actual individual consumption
in 2011 was close to the EU-27 average of 70% of GDP for most countries;
however, the range of the actual individual consumption per capita in euros
varied from €35000 in Luxembourg and €29600 in Denmark to €6400 in Hungary in
2011 (respectively €3400 in Bulgaria and €4200 in Romania based on last
available data for 2010). According to the survey the Baltic economies and
Greece were the most severely affected, with loss of actual individual consumption
(in volume terms) of 12% to 15% between 2008 and 2011.
European region is also the case of
multiple decisions regarding bailouts, fiscal discipline policies, strategies
for economic recovery and financial stability measures. According to the
European Financial Stability and Integration Report prepared in 2011, during
2008 and October 2011, the Commission approved total state aid measures of
€4.5trillion (36.7% of EU GDP), the majority of which in the form of guarantees
on bank liabilities. The actions taken to insure stability involved enhanced
financial supervision in Europe with established new European Supervisory
Authorities for the banking, securities markets and insurance and occupational
pensions sectors those started operating in January 2011, the Commission’s
contribution to the new Basel agreement on bank regulation (Basel III) in 2010,
the European Financial Stabilisation Mechanism (EFSM) and the European
Financial Stability Facility (EFSF) those were created in 2010 to provide up to
€500 bn to Member State governments for reduction of tensions in euro area
sovereign debt markets as well as established the permanent European Stability
Mechanism (ESM). The other policies include measures for increased transparency
such as temporary restrictions on short sales, prohibition to use credit
default swaps in emergency situations, standardised OTC derivative
transactions’ clearing via central counterparties as well as the maximum
guarantee cover for held deposits to €100000 and investors’ compensation scheme
to cover investments to €50000.
Moreover, financially fragile countries required financial
assistance to implement structural reforms in order the borrowing costs were
kept at sustainable level in the markets. According to the European Financial
Stability and Integration Report prepared in 2011, the joint European and IMF’s
financial assistance to Greece amounted €110 billion in 2010, financial
stability support to Ireland reached up to €85 billion. Portugal received an
approved €78 billion bail-out in May 2011. Additionally, the financial
assistance programmes have continued in Latvia, Romania and a precautionary
programme was also requested by Hungary. One of the exceptional cases could be
mentioned private investors’ voluntary acceptance of a 50% Greek bond haircut
which enabled both a €100 billion cut in Greece's sovereign debts and allowed a
new Greek programme of aid of €100 billion at the end of 2011.
European financial sector also
required governments’ interventions and bailouts of banks due to mismanaged
aggressive business strategies. According to the European Financial Stability
and Integration Report 2011, the total amount of state aid actually used by the
financial sector in EU 27 during October 2008 and December 2010 comprised €1.6
trillion (13.1% of EU27 GDP) of which: €1.2 trillion and other liquidity
measures; €288 billion for recapitalisations; €121 billion for asset relief
interventions. Restructuring of banks in Ireland, Denmark, Germany, Spain,
United Kingdom involved mergers, recapitalization, deleveraging and operational
optimizations.
In addition, the European Central
Bank’s (ECB) role was also significant. According to the European Central
Bank’s Annual Report 2009, following the consequences of financial crisis the
Governing Council of the ECB lowered interest rate on the main refinancing
operations at 1.00%, the rate on the deposit facility at 0.25% and the rate on
the marginal lending facility at 1.75% in 2009. The rates were slightly
increased in 2011 as a result of the improved economic outlook; however, due to
new demand of liquidity and intentions to support economic recovery with
facilitated lending to businesses, the interest rates were lowered even more in
2012. The effective rates from 11 July 2012 are the
following: rate
on the main refinancing operations is 0.75%, the rate on the deposit facility is
0.00% and the rate on the marginal lending facility is 1.55%. According to the
ECB’s annual report prepared in 2009, the enhanced credit support to
economy comprised the following five measures:
– the provision to
euro area banks of unlimited liquidity at a fixed rate in all refinancing operations
against adequate collateral;
– the lengthening of
the maximum maturity of refinancing operations from three months prior to the
crisis to one year;
– the extension of
the list of assets accepted as collateral;
– the provision of liquidity
in foreign currencies (notably US dollars); and
– outright purchases
in the covered bond market.
The first 12-month
LTRO, conducted on 24 June 2009, resulted in a record €442 billion being
allotted to the euro area banking system at a fixed rate of 1%, bringing the
total volume of outstanding refinancing operations to nearly €900 billion, and
thereby contributed to lower money market rates also at longer maturities. The stabilisation
in euro area and the recovery in asset prices from the record lows after the
collapse of Lehman Brothers were indicated first time at the end of the first
quarter of 2009. However, due to dysfunctional markets the ECB continued
interventions in 2010, 2011 and 2012. According to the European Financial Stability and
Integration Report 2011, between May 2010 and the end of December 2011 the ECB
bought securities those amounted €218 billion, and at the end of 2011 its holdings
contained about €211 billion. Furthermore, due to the ECB’s launched two 3-year
long-term refinancing operations (LTROs), the ECB allotted €489 billion in December of
2011 and during the second round of LTROs in February 2012 the ECB lent a total
of €529 billion.
Moreover, investigations of supervisory authorities
disclosed other systemic weaknesses of the European financial sector such as
mis-sales of insurance, illegally fixed Libor rates and money laundering cases.
Taxes on transactions and caps on bonuses are the further policies beside
increased capital and liquidity requirements those are intended to shift banks’
business models towards stability and credibility.
The basis of stronger
European Union was set in the Treaty on Stability, Coordination and Governance
in the Economic and Monetary Union on 2 March 2012. One of the main
elements of the Treaty was the so-called fiscal compact which proposes steps forward
towards greater budgetary discipline and better coordinated fiscal policies in
the EU. The other major agreement was reached regarding the European banking
union in December 2012. Member States agreed to give to the ECB a supervisory
responsibility. Тhe Single Supervisory Mechanism will enable the ECB to
detect risks in banking sector, request necessary actions, ensure compliance
with capital requirements, grant and
revoke licences for credit institutions.
Observations
about recent events
Considering the economic contraction,
raised unemployment and diminished consumption due to austerity measures the
European countries went through in order to balance their sovereign budgets,
stabilise financial sector and reduce borrowing costs, similar economic consequences
may affect the US as it also attempts to reduce sovereign deficit. According
to the Congressional Budget Act of 1974, an agreement for the budget for the
United States Government for fiscal year 2014 and appropriate budgetary levels
for fiscal years 2015 through 2023 should be achieved by April 15. The findings
of the House of Representatives reported by the Committee on the Budget at the legislative
text stated that measures those were used to boost economic activities during the recession
and early stages of recovery added over $1 trillion to the debt though
economy continues to perform at a subpar trend. Moreover, a view that large debt
levels impose higher tax burden, creates uncertainties for businesses, stagnates
the US economic growth and job creation was expressed. Consequently, the Budget
Committee proposed to spend $4.6 trillion less in the next decade compared to
the current path of spending. Private sector which is highly dependent on the government
stimulus policies may suffer the most due to the government’s budget discipline
policies.
Other potential threats for the financial stability
were reported in February and March. While money laundering investigations and €17 billion bailout
which was negotiating for Cyprus seemed to be insignificant in terms of the
scope of influence on financial markets, the downgraded UK’s AAA credit rating
to AA1 by rating agency Moody’s and the Bank of England’s estimates on the
capital shortfall of £35 billion for Britain’s banks if risk-weighted assets
were standardised are important risk factors considering investment. Moreover,
it seems that the US Federal Reserve’s report on the stress test of banks was
also ignored. According to the Federal Reserve’s released results on 7 March
2013, the nation's largest banks have
continued to improve their ability to withstand severe economic conditions with
stronger capital positions. However, due to the stress scenario which includes
a peak unemployment rate of 12.1%, a drop in equity prices of more than 50%, a
decline in housing prices of more than 20%, and a sharp market shock for the
largest trading firms, projected losses at the 18 bank holding companies would
total $462 billion during the nine quarters of the hypothetical stress
scenario. Additionally, the aggregate
tier 1 common capital ratio, which compares high-quality capital to
risk-weighted assets, would fall from an actual 11.1% in the third quarter of
2012 to 7.7% in the fourth quarter of 2014 in the hypothetical stress scenario.
Despite the
on-going fiscal discipline measures, economic contraction threats and estimated
potential losses due to financial shocks the S&P 500 Index
exceeded pre financial crisis level and reached 1556 on the 11th of
March 2013. The FTSE 100 Index similarly reached a new high of 6510 on the 12th
of March 2013.
Even though the international
standards and supervision on financial institutions were enhanced, deterioration
of assets’ value remains a major pressure on stability. Consequently, investors
may face waves of gradual downtrends if performance of companies misses estimated
earnings due to diminished consumption and weak economic growth. The other
possible scenario is higher volatility - if resilience of declined equities’
value is stimulated with continuing monetary easing policies.
And if it is not true, then how much
such development cost and how long such recovery last?
An invitation
Certainly, various regions are exposed to different
economic development and financial stability challenges; however, is it
possible to balance economy and financial stability by successful expansion of
sustainable businesses and reduced financial risks?
Taking into account threats of current economic
growth and financial stability issues, we would like to invite policy makers,
financial institutions, entrepreneurs and innovators, academics and other
interest groups to share their observations and experience those may help to
identify factors required to attract
investors and remove barriers for sustainable development. So, that
launched financial facility programmes supported development necessary to
strengthen resilience during financial shocks and contractions of economy.
Proposed topics are the following.
1.
The concept and benefits of sustainable development. Threats and barriers attracting
investors. Consumer’s preferences. Estimation of the long term value instead of
initial costs of the investment projects. Business resilience during financial
shocks and contraction of economy.
2.
Challenges introducing specific
sustainable development projects/investment opportunities in different regions.
The attractiveness of business
environment, issues related to the market uptakes of innovations, transfer of
knowledge and skills. Preparation of investment projects and managing risks of project
implementation.
3.
Business development,
competitive advantage of investment in environmentally friendly innovations
those let to achieve greater resource efficiency. International investment
opportunities, benefits and challenges of business development, international
cooperation, cross continental partnerships, required legal reforms,
preparation of business development plans and risk management.
4.
Market uptake of
innovations, issues related to standardisation and investment in innovations. Protection
of intellectual property rights, practices and strategies for launched innovations.
5.
Attractive investment
opportunities, expectations of investors, assessment of investment
opportunities, risk management practices. What makes proposed investment
project attractive?
6.
Fund raising practices.
Available alternative funds and financial facilities for implementation of
sustainable development projects. Preparation of investment proposal,
feasibility of investment opportunity, assessment of alternative strategies and
project risk management.
7.
Balanced interests in
public and private partnerships. Balanced rights and obligations of public and
private partnerships, challenges managing conflicts of interests.
8.
Financial stability
issues. Management of counterparty, credit and market risks. Practices and
challenges in estimation of risks, returns and costs of capital, assessment of
leverage in financial decisions.
9.
Sovereign wealth funds interest in sustainable
development solutions. Investment priorities of sovereign wealth funds,
assessment of attractive investment opportunities.
10. Managing conflicts of interests,
international disputes. Demand of legal advice, services and reforms.
If you are interested in
topics mentioned above and investment in sustainable development please let us
know.
Thank you for your time in
considering cooperation.
We look forward to hearing from you.
Yours sincerely,
Ms Asta Pravilonytė
Tel: +44
(0) 2083166205
Mob: +44
(0) 7531222596
22
Hastings Street
London
SE18 6SY
United Kingdom
