Maymester:Singapore Information Session: October 28 Maymester 2015 4-5 pm, VKC 300a th
Or contact Ashley Bonanno at
[email protected] Application due Nov. 14th Application Requirements: GPA above 3.2 IR Courses:210, and on East Asia Program Costs: 4 units of Spring 2015 Tuition: $6408 Room/Board: +/-$1300 Airfare and miscellaneous costs will be discussed at the information session/please contact Ashley Bonanno. Possible funding: SOAR, various centers on campus and Asian Foundation
IMF and the Financial Crises Lecture 18 Guest: Bozovic 10/28/14
Recap • Why did Mexico get into trouble? • IMF role in helping Mexico? • Today: – Asian Financial Crisis – Eurozone Crisis – Role of IMF
Lecture 18
3
Asian Financial Crisis Foreign currency reserves http://www.youtube.com/watch?v=HiphWQfB6 J0 Using reserves to stabilize currency http://www.youtube.com/watch?v=TZ7d5kjAlQ w
Lecture 18
4
Asian Financial Crisis Speculative attack on currency http://www.youtube.com/watch?v=P2IWGlR1S Hs&feature=relmfu
Lecture 18
5
Epicenter: Thailand • • • •
Capital inflow Expanding banking sector, loose regulation Real estate bubble, non-productive sector Issues: – Dollar appreciation = baht appreciation – Slowing economy – Real estate sector in trouble – About to take banking sector down with it Lecture 18
6
Epicenter: Thailand The conditions mentioned before set the stage for a speculative attack Asian Financial Crisis http://www.youtube.com/watch?v=lA3sjWwu5s&feature=relmfu
Lecture 18
7
Thailand goes down 1997 • Insufficient foreign currency reserves • Over-leveraged banks – Bad loans – Owe a lot in $$$
• Current account deficits increased – High consumption/spending during “good”times – Appreciating currency
Lecture 18
8
Asian Financial Crisis
• Contagion
– Malaysia, Indonesia, Korea, Philippines – Investors start pulling out of Asian economies – Herd mentality • don’t have time to wait for bad information; • pull out before we get hurt
Lecture 18
9
IMF response • Influx of money to generate confidence – Staves off capital flight – Problem: bailout for international banks
• Pro-cyclical fiscal policies – Policies: increase interest rates, cut spending – Problem: slows the economy, you need deficits during recessions – Counter: too late for that, drives up risk
Lecture 18
10
IMF response • Restructuring – Policies: closing banks, liberalizing markets – Problem: controversial, beyond IMF scope – Counter: ensures future ability to repay
• Encouraging openness – Policies: liberalization and restructuring – Problem: volatility, they already had a lot of savings – Counter: openness is a good thing for access to capital. Problem is too little regulation Lecture 18
11
Consequences • • • •
Eventual devaluations Unemployment soared, benefits cut GDP plummeted (graph: GDP growth) Banks closed Parallels?
Lecture 18
12
Consequences in Thailand
Lecture 18
13
Model
Lecture 18
14
Eurozone Crisis • Why single currency? • What made the markets excited about Greece? – Entry into the EU – Euro benefits – Signals potential future wealth
Lecture 18
15
Epicenter: Greece • Loss of confidence by the investors – New party declares the deficit numbers wrong – Capital flight and sovereign risk – Greece refuses to come to terms with this
• Contagion – Spain – Portugal – Italy • 7th largest economy • Fears among investors • IMF does not have enough money to bail out Europe
Lecture 18
16
Eurozone • Consequences? • Why can’t they just print money?
Lecture 18
17
Eurozone • Why isn’t austerity working? – You raise taxes and cut spending – This causes more recession – When the economy slows you raise less in tax revenue (less production and earnings) – Must raise taxes and cut spending even more – Causes mass protests and strikes
Lecture 18
18
Role of the IMF • “Troika” – IMF + EC + ECB
• Lending – Strengthening the banking sector, influx of capital
• Expertise – Monitoring and policy advice
• Legitimacy – Credibility vis-à-vis private investors – Independent of European national politics – Telling Germans to “tone down” their austerity demands Lecture 18
19
Critique • Not putting as many conditions on new loans • Relaxing the rules on involvement – High probability of debt sustainability does not hold in the case of Greece, Ireland, Portugal – Debt restructuring kicked down the street
Lecture 18
20
