Transcript Lecture 18: The IMF & Financial Crises (2)

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
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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
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Asian Financial Crisis
Speculative attack on currency
http://www.youtube.com/watch?v=P2IWGlR1S
Hs&feature=relmfu
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Epicenter: Thailand
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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
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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
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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
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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
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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
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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
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Consequences
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Eventual devaluations
Unemployment soared, benefits cut
GDP plummeted (graph: GDP growth)
Banks closed
Parallels?
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Consequences in Thailand
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Model
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Eurozone Crisis
• Why single currency?
• What made the markets excited about
Greece?
– Entry into the EU
– Euro benefits
– Signals potential future wealth
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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
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Eurozone
• Consequences?
• Why can’t they just print money?
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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
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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
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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
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