Bank Austria Creditanstalt Annual Report 2003

2003 saw a recovery of the banking sector after a two-year period of weak growth. Signs of a slow revival in demand for banking products and services were only discernible in the latter part of the year, as economic conditions improved. Interest rate developments provided little support, and trends on the volatile financial markets changed at an almost unprecedented rate. The corporate sector, and also banks, nonetheless succeeded in improving their structures: the foundation for a sustained improvement in profitability was laid by focusing on strategic core business, reducing interlocking equity interests and cutting costs, optimising balance sheet structures and improving the capital base.

By the second half of 2003 the global economy had weathered the worst of the adjustment crisis that had persisted for three years. However, the process of economic recovery was not consistent, nor did it affect each of the world’s three major economic regions in equal measure. As a sustained economic upturn was still not in sight after the Iraq war had ended, the US, as from May, employed all the means at its disposal for an expansive economic policy without regard for indebtedness (government spending, tax cuts, interest and exchange rate policy). In the second half of the year, economic growth in the US amounted to 4.0%, and growth throughout 2003 totalled 3.1%. Asia also experienced a strong recovery with growth of 3.9%, which it protected from adverse external factors by taking appropriate foreign trade-related measures and by intervening on foreign exchange markets. The ”old“ European countries, on the other hand, were preoccupied with implementing structural reforms which were long overdue, and they trailed behind the other two major economic regions. In the euro area GDP grew by a mere 0.4% on account of the revival in economic growth at the end of the year.

The financial markets had difficulty in identifying the turnaround in the course of the year. When it could finally be discerned, the markets either doubted the momentum and sustainability of the upturn or they focused on the risks arising from the imbalance of the world’s balance of payments. Money-market dealings, foreign exchange trading and bond trading, in particular, were all subject to manic changes in sentiment during the year.

Pessimism had turned into deflation hysteria by mid-June. The Federal Reserve lowered the federal funds rate to 1.0% until June, the lowest level in 50 years. The ECB lowered key interest rates in two steps (the sixth and seventh such moves since 2001) by 3/4 of a percentage point to 2.0%.
10-year benchmark yields had also fallen to new lows by the middle of June 2003 (US T-bonds fell to 3.07%, euro-denominated government bonds to 3.43%). In a parallel development, the euro appreciated significantly against the US dollar and the Japanese yen in a first wave (to US$ 1.19 for 1 euro and JPY 140 for 1 euro by May).
As expectations then changed on account of an expansive US economic policy, the bond market abruptly moved in the opposite direction in June/July and again in October. Long-term interest rates climbed by more than 1 percentage point on global markets to reach their highest level in the autumn, and expectations of higher interest rates again charac-terised the mood at the short end. By the end of 2003 long-term interest rates had again returned to around 4 1/4%, the level recorded at the beginning of the year, while short-term interest rates for the euro had by year-end fallen 3/4 of a percentage point below their initial level.
As from the middle of September, at the time of the G7 and IMF meetings in Dubai, the risks associated with the US economy’s function as the engine of growth again became a major concern. US economic diplomacy succeeded in achieving an appreciation of the Asian currencies, especially the yen. Based on a comparison with year-end 2002, the US dollar had depreciated by 17% against the euro, but by 11% against the yen as at year-end 2003. The yen had therefore depreciated by 8% against the euro. A number of currencies in CEE weakened against the euro with the US dollar, first and foremost the Polish zloty (by 15%), or they weakened on their own like the forint, which depreciated by 10% against the euro.
The world’s stock markets were unimpressed by these fluctuations and continued their steady upward trend which had commenced in the middle of March. The global equities index rose by 35%, and the EuroStoxx index by 18%. The German Stock Exchange (DAX +37%) and Vienna’s ATX (+34%) were among the best performers despite mixed economic results. The stock markets in this way evidently acknowledged the tough adjustment measures taken by companies in regard to strategy, costs and efforts to place their financing structure on a sound footing. The boom in new issues and the sharp fall in corporate bond spreads and credit swap spreads also fit this picture.