Maymester:Singapore Information Session: October 28 Maymester 2015 4-5 pm, VKC 300a th Or contact Ashley Bonanno at bonanno@usc.edu 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