Financial Crisis Hits the Real Economy

Chart 17 Financial Crisis Impairs Corporate Sector Financing Internal and External Corporate Finance Conditions Moving four-quarter totals in EUR billion % 90 50 Marked Economic Downturn in Austria 80 45 In the first half of 2009, the impact of 70 40 35 the international economic crisis on 60 Austria’s economy gathered momen- 30 50 tum. Real GDP went down in the first 25 40 quarter of 2009 and is likely to decline 20 30 in the second quarter as well. As the 15 year progresses, the tax reform and 20 economic stimulus packages should 10 dampen the economic slump. 10 5 The gloomy economic outlook also 0 0 Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08 dampened capital formation. New or- Internal finance – depreciation ders in manufacturing in Austria were Internal finance – changes in net worth External finance on the decline since fall 2008, capacity Share of external finance (right-hand scale)

utilization shrank and investment Source: OeNB. dropped sharply. Finally, the growth rate of corpo- significant listings have been made on rate profits also weakened considerably. Wiener Börse since mid-2008. New In the fourth quarter of 2008, the gross issues came to 0.4% of outstanding operating surplus (including mixed in- amounts in the first quarter of 2009. come of the self-employed) had still In addition to investors’ more pro- been 4.6% above the same value of the nounced risk aversion, these figures previous year. stem from the sharp fall in equity prices and the resulting marked deterioration External Financing Share Decreases of the conditions for raising capital on In 2008, external financing contracted the stock exchange. By November by roughly one-third to EUR 22.4 bil- 2008, the earnings yield – the inverse lion compared to 2007, whereas inter- of the price-to-earnings ratio – ex- nal financing in the corporate sector panded to 17%, up from 6.5% recorded rose by 8% to EUR 39 billion. The in mid-2007 when the financial turmoil share of external financing in corporate began. Afterwards, tensions eased finance, which had risen from less than again, bringing the earnings yield back 20% in the first quarter of 2005 to just down to 11.1% at the end of April under 50% in the first quarter of 2008, 2009. fell back to 36% in 2008. In the second half of 2008, corpo- rations raised approximately 29% of Financial Crisis Causes Equity their external financing in the form of Financing to Grind to a Halt equity (including over-the-counter The decline in external financing is equities) – noticeably less than in the traceable mainly to the drop in capital preceding years (average for 2003 raised on the stock exchange. Financ- through 2007: 48%). The proportion ing via the stock exchange came to a of shares in total liabilities contracted standstill as a result of the crisis. No from 52% to 44% in 2008, a develop-

24 FINANCIAL STABILITY REPORT 17 – JunE 2009 Financial Crisis Hits the Real Economy

ment due to both the reduced amount Bank Lending Has Been Augmenting of capital raised and to the lower mar- Bank loans gained importance among ket value of quoted shares. corporate external financing options in

Chart 18 2008, accounting for 73% of external finance in the fourth quarter of 2008 Key Elements of External Corporate and recording an annual growth rate of Finance 7% in March 2009. For the first time Annual change in % since Stage Three of Economic and 40 Monetary Union began in 1999, the 35 growth rate of banks’ lending to enter- 30 prises was higher in Austria than in the

25 euro area as a whole, where bank lend- ing growth diminished far more. How- 20 ever, in the first three months of 2009, 15 bank lending growth weakened to EUR 10 0.6 billion from EUR 2.3 billion in the

5 fourth quarter of 2008. Bank lending growth partly offset 0 the near-paralysis of capital market –5 financing. Moreover, it is conceivable –10 that companies resorted to bank loans 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 to meet their higher liquidity needs, a Loans Bonds Quoted shares conclusion that is corroborated by the Source: OeNB. circumstance that the rate of increase in enterprises’ bank deposits plum- Bond Financing Continues to Expand meted from fall 2008 onward. So far, corporate debt financing has weakened less than corporate equity financing. Bond financing continued to Chart 19 increase, albeit with less momentum. Credit Line Utilization as Captured by The annual growth rate of corporate the Central Credit Register bonds according to the OeNB’s securi- % ties issues statistics ran to 9.3% in 85 March 2009 and has remained above 84 the rate for the euro area. Enterprises 83 in the quasi-public sector accounted for 82 the lion’s share of bonds issued. The financial crisis has caused the 81 terms and conditions for bond issues to 80 worsen substantially. In fall 2008, cor- 79 porate bond yields on the euro bond 78 market rose markedly in the wake of heightened uncertainty and higher risk 77 aversion and later stabilized at a high 76 level. Yields went up above all for 75 higher-risk bonds, and in April 2009, Jan. Feb. Mar. Apr. May Juni July Aug. Sep. Okt.Nov.Dez. Jan. Feb. Mar. yields on BBB-rated bonds came in at 2008 2009 about 8.5%. Source: OeNB.

FINANCIAL STABILITY REPORT 17 – JunE 2009 25 Financial Crisis Hits the Real Economy

Possibly, the current bank lending cuts by the ECB. In March 2009, inter- expansion partly reflects past borrow- est on new loans of up to EUR 1 mil- ing decisions of companies and their lion to nonfinancial corporations came stepped-up access to credit lines that to 3.4%, on loans of over EUR 1 mil- were extended some time ago. Data are lion to 2.8%, some 2½ percentage available only for major loans of above points below the October 2008 level in EUR 350,000 and show that compa- both cases. nies’ usage of available credit lines in- While banks may have cut interest creased more than banks’ extension of rates on loans, they also tightened lend- new credit lines. As a result, the ratio ing standards. According to the Aus- of utilization of credit lines and the ex- trian results of the euro area bank lend- tension of new credit lines advanced ing survey, the financial crisis has been continuously throughout the year 2008 hampering refinancing conditions and from about 79% to just under 84%. In lending policies, especially in the cor- the first quarter of 2009, utilization of porate customer segment, for almost credit lines continued to edge upward two years. Moreover, the worsening of (chart 19). the economic outlook and more selec- Since November 2008, interest on tive credit ratings have contributed to a loans has decreased considerably as a restrictive lending policy. Since the result of the massive key interest rate third quarter of 2007, credit standards for corporate clients have become con- Chart 20 tinuously more restrictive, and condi- Corporate Financing Conditions tions and terms – interest margins as % well as collateral requirements, the size 18 and maturity of loans granted, the cov- 16 enants as well as noninterest rate charges – have been tightened. 14

12 Deterioration of Creditworthiness 10 Increasing use of debt financing raised

8 the ratio of companies’ debt to their gross operating surplus from 187% in 6 the first quarter of 2007 to 205% in 4 the fourth quarter of 2008. Debt in 2 relation to GDP also rose from 77% in

0 the first quarter of 2007 to 84% in 1996 1998 2000 2002 2004 2006 2008 the fourth quarter of 2008. However, Loans (interest rate for new euro loans of more than EUR 1 million) Austrian company debt is still far lower Bonds (yields on BBB-rated corporate bonds in the euro than the euro area average, and it area) Shares (earnings yield on the Austrian stock market) started to expand later than in the euro

Source: OeNB, Thomson Reuters, Wiener Börse AG. area, where the increase already began in 2005.

26 FINANCIAL STABILITY REPORT 17 – JunE 2009 Financial Crisis Hits the Real Economy

Chart 21

Corporate Sector Debt1 Austria Euro area % % % % 240 100 240 100

230 95 230 95

220 90 220 90

210 85 210 85

200 80 200 80

190 75 190 75

180 70 180 70

170 65 170 65 2001 2002 2003 2004 2005 2006 2007 2008 2001 2002 2003 2004 2005 2006 2007 2008 % of gross operating surplus2 (left-hand scale) % of GDP (right-hand scale)

Source: ECB, OeNB. 1 Short-term and long-term loans, short-term and long-term debt securities. 2 Including mixed income of the self-employed.

Insolvency statistics clearly signal that in 2008 the bulk of insolvencies the deterioration of corporate credit- still resulted from bankrupt companies’ worthiness. Insolvency numbers and internal problems. But a noticeably liabilities have been going up since the larger number of insolvencies than in second quarter of 2008. An analysis of previous years was triggered mainly by the Austrian credit monitoring agency external causes, such as changed mar- Kreditschutzverband von 1870 shows ket conditions, insolvencies of custom- ers or delivery failures of suppliers. Chart 22 Their share went up from 10% to 16%. Development of Corporate Insolvencies The share of insolvencies traceable to a Moving four-quarter averages, annualized in % shortfall of capital was of the same 3.4 0.80 order and remained unchanged in 3.3 0.75 2008. 3.2 0.70 Conclusion: Crisis Seizes Corporate 3.1 0.65 Finance 3.0 0.60 The financial crisis is impairing Aus- 2.9 0.55 trian corporate financing. Since the on- 2.8 0.50 set of the crisis, companies have had to resort increasingly to borrowing to 2.7 0.45 offset the decline in corporate profits 2.6 0.40 and external equity financing. Conse- 2.5 0.35 quently, the share of bank lending, 2004 2005 2006 2007 2008 2009 which had clearly lost significance in Default frequency (number of insolvencies as a percentage of companies; left-hand scale) the years leading up to the financial Insolvency liabilities as a percentage of corporate liabilities (right-hand scale) crisis, augmented substantially. Banks have, of course, tightened their lending Source: Kreditschutzverband von 1870, OeNB. standards and have been factoring their

FINANCIAL STABILITY REPORT 17 – JunE 2009 27 Financial Crisis Hits the Real Economy

clients’ risk-bearing capacity and eco- the Austrian labor market to deterio- nomic prospects more strongly into rate, weakening disposable incomes lending decisions, but in the aggregate, and dampening consumer spending lending to the corporate sector has ex- growth, which came to just 0.9% year panded up to now. The downside is that on year in 2008. The high household more borrowing from banks has swelled saving rate, which advanced from companies’ debt: After rising for years, 11.6% in 2007 to 12.4% in 2008, is ev- equity ratios dropped in 2008. Aus- idence of high uncertainty and a lack of trian companies have a greater latitude household confidence in the economic for taking out new debt than euro area outlook. companies on average, but primarily debt-based corporate finance carries Lending to the Household considerable long-term risk, despite Sector Weakens the fact that current low interest rates Declining by EUR 0.8 billion in the dampen the cost involved in borrow- first quarter of 2009, the growth of ing. lending to households has slumped. This corresponds to a 3.2 percentage Substantial Price Losses Hit 1 point reduction in credit growth against Households’ Financial Assets the same quarter of 2008 – credit Uncertain Business Environment growth had come to 4.4% in the first The economic downturn in the first quarter of 2008 compared to 1.2% in quarter of 2009 caused conditions in the first quarter of 2009.

Chart 23 Lending Growth and Real Estate Prices Growth of Lending to the Household Sector Growth Rate of the Real Estate Price Index1 Change on the same quarter of the previous year in % Change on the same quarter of the previous year in % 16 12

14 10 12

10 8

8 6 6

4 4 2

0 2

–2 0 –4

–6 –2 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Other loans Consumer loans Austria EU-15 Housing loans Total

Source: ECB, OeNB, Statistics Austria, Vienna University of Technology. 1 In nominal terms. For Austria, population-weighted average of Vienna and the rest of Austria (in line with the ECB method).

1 In the following, the terms households and household sector will be used synonymously.

28 FINANCIAL STABILITY REPORT 17 – JunE 2009 Financial Crisis Hits the Real Economy

A breakdown of lending to house- November 2008, though, with Aus- holds by loan type shows that lending trian MFIs charging clearly lower inter- weakened above all in the consumer est rates on housing loans to Austrian loan category, where the March 2009 households than on consumer credit. figure was 4.0% below the comparable In addition, the results of the bank year-earlier value (see chart 23, left- lending survey indicate that credit stan- hand panel). The results of the OeNB’s dards for consumer and housing loans bank lending survey (a quarterly survey were tightened slightly in the first quar- on bank lending in the euro area) in the ter of 2009 in view of banks’ high refi- most recent quarters suggest that the nancing costs and the gloomy economic deterioration of consumer confidence outlook. was instrumental in dampening de- The share of foreign currency loans mand for consumer credit. The annual- in total lending to households fell by ized growth rate of housing loans also half a percentage point to 30.3% in the diminished to 3.4% in the first quarter first quarter of 2009. Swiss franc-de- of 2009, bringing it some 4.5 percent- nominated loans still accounted for the age points below its year-earlier level. majority of such loans (94%), and Japa- Nevertheless, this decline was far less nese yen-denominated loans for just pronounced than in a number of other 5%. As the Swiss franc continued to euro area countries that are more se- strengthen against the euro, (unreal- verely hit by the weakening of their ized) revaluation losses on foreign Swiss housing markets than Austrian, as a franc-denominated loans came to 1.8% comparison of real estate price indexes of the volume of foreign currency shows (see chart 23, right-hand panel). loans. Moreover, until the end of 2008, Performance risk represents a fur- the demand for housing and consumer ther risk for households’ debt-servicing credit was dampened by the long-term capacity. In the first quarter of 2009, rise in interest rates on loans. Lending roughly 74% of all loans to households rates have been on the decline since were based on a repayment vehicle. A

Chart 24 Household Debt Austria Euro area % % % % 61 61 98 98 59 59

57 57 93 93 55 55

88 53 88 53

51 51 83 83 49 49

78 47 78 47 2001 2002 2003 2004 2005 2006 2007 2008 2001 2002 2003 2004 2005 2006 2007 2008 % of disposable income (left-hand scale) % of GDP (right-hand scale)

Source: ECB, OeNB.

FINANCIAL STABILITY REPORT 17 – JunE 2009 29 Financial Crisis Hits the Real Economy

current survey (see box 3 “Survey on able income – stagnated after having the Risks of Loans Linked to Repay- trended upward for some time. Thus, ment Vehicles” in the section “The the interest rate burden remained at Financial Crisis Takes Its Toll on the 3.9% in the fourth quarter of 2008, the Austrian Financial System”) shows that same level as in the third quarter. The there is a gap in the coverage of repay- most recent developments have already ment vehicle-based lending to house- shown a contraction of the household holds that could result in an additional interest payment ratio and therefore a financial burden to households. stabilization of their interest rate risk. Austrian household debt is charac- Stabilization of Household Debt terized by a certain degree of heteroge- With the growth rate of lending to neity masked by the aggregated data. households easing continuously, the First, not all households indeed carry debt ratio of this borrower category has debt; consequently, the aggregated in- remained stable in spite of the slower terest payment ratio is too low for those increase in disposable incomes. At the households that have taken out debt. end of 2008, the household debt ratio Second, the debt-servicing capacity came to around 89% of disposable in- also depends on individual household come or roughly 53% of GDP (see chart income. First calculations on the basis 24). Thus, Austrian household debt is of an OeNB-commissioned survey on moderate by comparison to the euro household real estate assets (OeNB area average of 99% of disposable in- Household Survey on Housing Wealth come or 61% of GDP. 2008)2 signal that in 2007 the debt-ser- The development of debt regulation vicing ratio (interest payments and proceedings, i.e. private bankruptcies, principal repayments as a percentage of also reflected the stabilization of house- household net incomes) was above aver- hold debt: Whereas the number of pri- age for the lowest-income households vate bankruptcies went up by 6% year and below average for the highest-in- on year in the first quarter of 2009, the come households. volume of default liabilities expanded Third, the impact of interest rate less than households’ total liabilities. changes depends on the type of interest rate agreed for the respective loan. In Interest Rate Risk Is Stable Austria, the share of variable rate loans With interest rates on loans declining is traditionally very high (83.6% in the in recent months and as a result of sta- first quarter of 2009 compared with bilizing household debt in 2008, house- 47% in the euro area). Hence, market holds’ debt servicing burden – interest interest rates have a rapid impact on payments as a percentage of net dispos- loan interest.

2 See Fessler, P. et al. 2009. Real Estate Wealth of Austrian Households (preliminary title). In: Monetary Policy & the Economy Q2/09. Vienna: OeNB, forthcoming.

30 FINANCIAL STABILITY REPORT 17 – JunE 2009 Financial Crisis Hits the Real Economy

Box 1 Real Estate Financing by Austrian and Euro Area Private Households Real estate debt accounts for the lion’s share of household debt. In summer 2008, the OeNB conducted a survey on housing finance among the Austrian banks most heavily engaged in mortgage lending. A report on housing finance in the euro area provides additional infor- mation.1 The main results of both the survey and the report are summarized below. In the past decade, household debt for house purchase rose both in Austria and the euro area (from EUR 54 billion in 2001 to EUR 87.8 billion in 2007 in Austria). Several factors contributed to this rise: comparatively low interest rates, increasing disposable incomes and population growth figures, deregulation and liberalization trends that boosted the number of providers and widened the range of financial products. Given the low interest rates level, households’ interest rate burden remained under control despite the rise in debt. The loan-to- value ratios (LTVs) rose, and households were given more flexible repayment terms, e.g. longer repayment periods than at the beginning of the 1990s. According to the housing finance survey, LTVs required by Austrian banks ranged from 70% to 96% in 2007, and the maximum duration of mortgage loans extended in 2007 came to 25 to 30 years. The mortgage spread, i.e. the difference between interest on housing loans and banks’ refinancing costs, has diminished in the course of time. This phenomenon may signal stepped- up competition. Moreover, in recent years, more securitization, improved financing conditions and a possible underestimation of risks may have contributed to looser credit standards (though much less so than in the U.S.A. or the U.K.). The share of variable-rate credits ranged between 10% and 99% of total loans in the euro area in 2007. This huge range is likely to have resulted from different cultural, institutional (e.g. consumer protection considerations) and regulatory as well as fiscal factors (e.g. tax breaks for owner-occupied housing). In Austria, the majority of new loans carry variable inter- est rates – for new housing loans, the share of variable rate loans ranged from 52.8% to 68.5% in 2008. In Austria, foreign currency lending plays a key role in housing finance. Foreign currency- denominated loans accounted for 39.2% of all Austrian housing loans in 2008.

1 ECB. 2009. Housing Finance in the Euro Area. ECB Occasional Paper No. 101.

Continued Large Revaluation Losses was due primarily to the negative in Financial Assets growth contribution of mutual fund The transaction volume of household shares. The annual growth contribu- financial assets dropped in 2008 in the tion of this investment category came wake of rising uncertainty and gloom- to –1.1% in the fourth quarter of 2008, ier economic prospects. In the fourth following –0.1% growth in the compa- quarter of 2008, the transaction vol- rable quarter of the previous year (see ume weakened to EUR 2.7 billion, chart 25). At 0.5% in the fourth quar- which corresponds to a slowing of the ter of 2008, the growth contribution of rate of growth from 4.6% in the fourth life insurance assets was also lower than quarter of 2007 to 4.1% in the fourth the 0.7% recorded a year before. The quarter of 2008 – a rate last seen in the reductions contrast with the increase in second quarter of 2002 (see chart 25, the growth contribution of deposits and left-hand panel). bonds, with the expansion of bank Households sought to invest in safe deposit guarantees likely to have played investment vehicles, shifting large parts an important part. of their portfolio toward less risky as- Additionally, massive price losses in sets: Their weaker financial investment the capital markets resulted in market

FINANCIAL STABILITY REPORT 17 – JunE 2009 31 Financial Crisis Hits the Real Economy

Chart 25 Determinants of Change in Household Financial Assets Transactions1 (including growth contributions of Valuation changes1 (including growth contributions individual financial instruments) of individual financial instruments2) % % 7 6

6 4 5 2 4

3 0

2 –2

1 –4 0 –6 –1

–2 –8 Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08 Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08 Mutual fund shares Mutual fund shares Quoted shares Quoted shares Currency and deposits Currency and deposits Securities other than shares Securities other than shares Debt securities Debt securities Transactions, total Valuation changes, total Life insurance, pension fund reserves and other claims Life insurance, pension fund reserves and other claims Source: OeNB.

1 As a percentage of total financial assets four quarters before. 2 Calculated on the basis of securities data in the case of mutual fund shares, quoted shares and debt securities; calculated as the difference between stock changes and transactions for the remaining aggregates.

value losses of household financial as- Conclusion: Household Sector Risks sets also in the second half of 2008 (see Have Increased chart 25, right-hand panel). These Financial sector-induced risks to the losses hit quoted shares especially hard: household sector have risen massively The negative valuation effects of this as- in the first half of 2009. High valuation set category caused overall household losses in capital market investment had financial assets to shrink by 3.3% in the noticeable effects on the second and fourth quarter of 2008 against the same third pillars of pension provision and quarter of 2007. Measured in terms of on the repayment vehicles for redeem- households’ 2007 year-end financial ing foreign currency loans. Conversely, holdings, stock price losses affected sagging credit growth has stabilized 59% of households’ portfolio of quoted debt, which, in tandem with the most shares. The growth contributions of recent cuts in interest rates, has re- mutual fund shares and life insurance duced the interest rate burden on as well as pension fund reserves were households. More unfavorable pros- also negative in the fourth quarter of pects for the labor market and for dis- 2008, reducing financial assets by 0.6% posable income have increased the risk and 0.2%, respectively, against the pre- related to households’ debt-servicing vious year. Plummeting stock market capacity, with the debt-servicing bur- prices thus had an adverse effect on den being proportionately higher for funded pension instruments. lower-income households in particular.

32 FINANCIAL STABILITY REPORT 17 – JunE 2009