Transcript File - UMP English Orator Site

ECONOMY
GREEK ECONOMIC RECESSION
Problem
• Owes €300bn – 3 yrs of recession
• IMF bailout package 2/5 – biggest
• €110bn X 3 yrs – ↓ public spending & ↑ tax
revenue
Source
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Economic reform 1/1/01 – drachma → €
Easy to borrow money – spent more
Eg 2004 Athens Olympics – over budget
Hit by downturn – more benefits, less taxes
Lenders charge higher IR + tax evasion
Demonstration – salary cut
Solutions
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Bail out succeeds
Debt restructuring
Greece abandons the €
Default
Tax reform
http://news.bbc.co.uk/2/hi/business/8648456.stm
1997 ECONOMIC CRISIS
Problems
• Shortage of foreign exchange → values of
currencies ↓
• Inadequately developed financial sectors &
mechanisms for allocating capital
• Effects of the crisis on USA & the world
• Role, operation & replenishment of funds
from IMF
Currency Depreciation
Round 1
• Sharp drop in
value
• Thai, M’sia,
Philippine, I’sia
• Stabilized →
Round 2
Round 2
• Downward
pressures
• Taiwan, SK, Brazil,
S’pore, HK
Gov sold FEX rsv & ↑ interest rates
Slowed econ growth, interest-bearing
securities more attractive > equities
Revealed severe problems in banking &
financial sectors
IMF provided support packages for Thailand,
I’sia & SK
IMF extended & augmented credit to P’pines
Markets are interlinked
Impede trade progress
& investment
liberalization under
WTO & APEC forum
Significant investments
US Interest
Exposed weaknesses of
Asian financial
institutions
Involvement in IMF
Affect US import +
export, capital flow &
value of USD
IMF Stabilization Packages
Strengthen IMF
surveillance on
member
countries’
policies
Technical
assistance to
strengthen
financial
markets
operation
Quickly
providing policy
advice &
financial
assistance
Ensure no
member
country is
marginalized
IMF Criticism
Exacerbates
econ
problems
One size fits
all
Decline in
public
services
Remove
political
autonomy
Moral
hazard
Malaysian Measures
IR reduced
Statutory rsv requirements
reduced
Stabilized exchange rate
Closing overseas trading of
RM
Regulating capital flows
Maintain financial stability
Restructuring
• Breathing space
• More lending
• Increased liquidity
• Increased lending by banks
• Gov boosted its spending
• Pegged RM3.80 to 1USD
• Ended currency fluctuations & speculations
• Trade of Msian shares in Spore
• Ended speculative activities in the currency & local shares
• Esp short-term capital outflows
• Initial 1-yr moratorium on outflow of foreign portfolio
capital & foreign-owned assets
• Policy – x close down troubled financial inst.
• Announce gov will guarantee deposits
• Retain confidence
• Est of Danaharta & Danamodal
• Revitalize economy
2008 CREDIT CRUNCH
Securitization
• Loans tied up for decades → banks pool
various loans → sellable assets: securities →
buyer gets regular payments → banker offload risky loans onto others
• Banks borrowed more money to lend out
• Investment banks (eg Lehman Bros.) bought
mortgages → turned to riskier loans
• Rising house prices misled buyers
Pricing options
• Option – insurance against cons of investing
• Black-Scholes model – priced options – easier
to trade → explosion of derivatives market
• Take more risk to make more money – greed
→ hedge funds, credit default swaps
• No need to pay full actual amount
• Big profit on little capital
• Big losses → more betting
Most analysts link the current credit crisis to the sub-prime
mortgage business, in which US banks give high-risk loans to
people with poor credit histories.
These & other loans, bonds or assets are bundled into portfolios or Collateralized Debt Obligations (CDOs) - & sold on to investors
globally
Falling house prices & rising interest rates lead to high numbers
of people who cannot repay their mortgages. Investors suffer
losses, making them reluctant to take on more CDOs. Credit
markets freeze as banks are reluctant to lend to each other, not
knowing how many bad loans could be on their rivals' books
The impact of the sub-prime mortgage crisis is quickly shown to
have implications beyond the United States. Losses are felt by
investment banks as far afield as Australia. Firms cancel sales of
bonds worth billions of dollars, citing market conditions
The US Federal Bank and the European Central Bank tries to
bolster the money markets by making funds available for banks
to borrow on more favorable terms.
Interest rates are also cut in an effort to encourage lending
But the short-term help does not solve the liquidity crisis - or
availability of cash for banks - as banks remain cautious about
lending to each other.
A lack of credit - to banks, companies & individuals - brings with it
the threat of recession, job losses, bankruptcies, repossessions &
a rise in living costs.
UK bank Northern Rock seeks an emergency loan to stay afloat,
prompting a "run" on the bank, as worried customers withdraw
£2bn. The bank is later nationalized. In the US, the near-collapse
of Bear Stearns leads to a crisis of confidence in the financial
sector & the end of investment-only banks
Seeking a long-term solution, the US government agrees a
$700bn bail-out that will buy up Wall Street's bad debts in return
for stake in the banks. The US government plans to borrow the
money from world financial markets & hopes it can sell the
distressed assets back once the housing market has stabilized
The UK government launches its own bail-out, making £400bn
extra capital available to eight of the UK's largest banks and
building societies in return for preference shares in them. In
return for its investment, the government expects to get a stake
in the banks - although exactly how much is not quite clear yet
Economies around the world are affected by the credit crunch.
Governments move to nationalize banks from Iceland to France.
Central banks in the US, Canada & some parts of Europe take the
unprecedented step of co-ordinating a half-point percent cut in
interest rates in an effort to ease the crisis
Shares have risen & fallen with news of failures, takeovers and
bail-outs. In part, this reflects investors' confidence in the
banking system. While bank shares have been hammered
because of bad debts, retailers have been hit as consumer
confidence is shaken by falling house prices & job insecurity
ICELAND
Time line
http://news.bbc.co.uk/2/hi/europe/7851853.stm
Privatized & deregulated banking system
Strong gov support – grew 10x
Poor enforcement
Started borrowing from other banks
Opened high IR accounts in UK
Used European savers to provide liquidity
Financial crisis & lax government - collapse
FREE TRADE
Principles
• Sustained economic growth → human
progress
• Free markets without gov interference →
efficient & socially optimal allocation of
resources
• Benefits everyone
• Privatization removes inefficiencies of public
sector
• Gov provide infrastructure
Criticism
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Imbalance in power & decision-making
Environmental degradation
Eroding workers’ rights
Protectionism for the rich