The European Central Bank (ECB) published a first thorough report taking look at the impact on taxpayers of the financial sector support measures taken in the latest ten years, following the Great Financial Crisis. This is done by focusing on the measures’ impact on deficits and debt, and on the state guarantees granted to banks and other financial institutions.
Financial sector support measures can affect deficit and debt differently. Unless they are financed from cash reserves, financial sector support measures will increase the general government gross debt. Whether they will also affect the budget balance depends on whether the operation presents a clear loss for the government. If so, they are classified as a capital transfer for statistical purposes, meaning they have an impact on the budget balance and debt ratio. The acquisition of financial assets above market price and capital injections to cover bank losses are typical examples of this.
In case the government receives shares in a bank or debt securities that are considered to be of equal value to the capital injection it provides, the support measure is classified as a financial operation that only affects the general government gross debt. The statistical reclassification of entities from the financial sector to the general government sector, notably reflecting the nationalisation of banks, also increases government debt but not the budget deficit.
The fiscal impact of the financial sector support that euro area governments provided following the 2008 financial crisis was large and varied greatly across countries, and has only partially been reversed. During and after the global financial crisis most euro area governments provided support to individual financial institutions in order to safeguard financial stability.
Impact of financial sector support measures on euro area deficit and debt, and volume of contingent liabilities (GDP%)
Source: European Central Bank
At the euro area level, financial sector support measures had a very large impact on the aggregate budget deficit in 2010 (0.7% of GDP), 2012 (0.5% of GDP) and 2013 (0.3% of GDP) (see Chart A). Viewed across several years, the scale of the impact was in many cases equal to, or even far greater than, the effect of fiscal measures taken during regular budget cycles. Eight countries saw a cumulative impact between 2008 and 2017 that was higher than the euro area average, varying from an increase in the budget deficit of more than 4 percentage points of GDP in Spain, Austria and Latvia to more than 27 percentage points in Ireland.
The impact on the euro area debt-to-GDP ratio, which peaked at almost 5.9% in 2012, stood at 4.1% in 2017. The maximum impact of the support measures on the debt-to-GDP ratio was 10% or more in eight euro area countries, including Germany, the Netherlands, Austria and Slovenia as well as the four euro area countries that required an EU/IMF adjustment programme (Ireland, Greece, Cyprus and Portugal). The time profile of the impact of the support measures on the general government gross debt varies considerably.
The impact has started to partially and slowly reverse in most countries and in the euro area as a whole, thanks to the income generated from the support measures, such as dividends received on shares in financial institutions and fees received for public guarantees, and the sale of financial assets. Across countries, the recovery from the support provided has been particularly pronounced in Ireland, where the impact of financial sector support measures on the debt-to-GDP ratio had declined by 30 percentage points by 2017 compared with the peak, and also the Netherlands (ten percentage points since the peak), Latvia and Germany (six percentage points since the peak). However, support measures added to the debt in Italy, Cyprus and Portugal in 2017.
Euro area contingent liabilities fell from more than 8% of GDP in 2009 to 1.4% in 2017. In most cases, the explicit guarantees that many euro area governments provided to individual institutions at the height of the financial crisis or, in a few instances, the financing of asset management vehicles have been phased out. This mostly represents a positive development, as a return to financial stability meant there was no need to renew expiring guarantees.
Some guarantees have however been called, and receiving entities have been classified in the general government sector, causing the reduction in the guarantee to be matched by an equivalent increase in government debt and/or deficit. For example, one-fifth of the guarantees provided as part of the partial privatisation of the Portuguese bank Novo Banco in October 2017, amounting to 2% of GDP, have been called, serving to increase the 2018 deficit by 0.4 percentage point of GDP. Six euro area countries, including France, Italy and Spain, still had outstanding contingent liabilities exceeding 1% of GDP in 2017. In addition, in July 2018 Cyprus provided guarantees for an asset protection scheme (APS) as part of the sale of the Cyprus Cooperative Bank (CCB). The APS covers potential unexpected losses on assets which have been acquired by the buyer of CCB, amounting to about 13% of GDP.
The widespread, large and long-lasting fiscal impact of financial sector support measures underlines the importance of further reinforcing the institutional framework in the euro area.