Caveats Themes are moving targets FC of 2008 is not - - PowerPoint PPT Presentation

Caveats



Themes are moving targets



FC of 2008 is not identical/coincidental but co‐ relational to Euro crisis



Causes of the Euro crisis vary between the countries



Effects, for the most part, early to measure of steps taken to deal both issues



Not all ROs have mandate on issues of financial surveillance and banking (EU, CEMAC’s COBAC)



Finally work in progress to further map competences

• f ROs

in this area

Main questions



What were causes, effects and responses of the FC of 2008 and of the Euro zone sovereign debt crisis?



What did regional (financial) organisations do to address the problems?



What are dangers of these problems not being addressed?

Practical goal



This discussion is meant to provoke further reflections on the current situation and especially for participants to reflect on the implications of the crisis

• n their own research themes



Structure



The 2008 crisis: causes; effects; reactions



The Euro Sovereign Debt Crisis: causes; effects and reactions



The RFOs



Their actions in response to the 2008 crisis



Challenges and prospects

The 2008 FC: Quid?



Regarded as the greatest economic crisis since the Great Depression of the 1930s. The financial crisis itself ended between end 2008 and mid 2009 but the aftershocks continue to reverberate.

Main stimulant



Construction boom since 1980s with Fed maintaining low interests and foreign cheap money coming into the US there was a sense of debt financed consumption: easy credit for cars, mortgages, credit cards



As the housing boom surged so too did mortgaged backed securities (MBS) and collaterized debt obligations (CDOs) whose value is a function of the housing prices.



With bursting of the bubble, housing prices declined and those who had invested in MBS and CDOs reported serious loses



Falling housing prices meant prices of many houses became less in value than the mortgage loan hence foreclosures. Defaults in the housing market expanded to other sectors of the economy

Sub causes



Housing bubble and sub prime predatory lending: Between 1997 and 2006 the value of a typical US house increased by 124 per cent. As a result people started getting into second mortgages etc. Then Wall Street suddenly realized that trillions of outside money was looking for investment options in the US and so MBS and CDOs

• developed. This extended the
• bubble. By September 2009 over 14% of US mortgages

were either delinquent or in foreclosure.

Sub causes



Deregulation that did not keep pace with the shadow banking system, derivatives (Buffett’s financial WMDs); off balance sheet financing. Deregulation examples included 1982 Garn St Germain Depository Institutions Act introducing ARMs; 1999 Gramm‐ Leach‐Bliley Act that amended Glass Steagall

• f 1933

removing separation between commercial and investment banks; 2004 SEC introduced Net Capital Rule that increased levels of debt that investment banks could take on board

Sub causes



Too much debt and leverage both by companies and

• consumers. Eg

in 1981 US private debt was 123% of

• GDP. That figure was 290% by third quarter of 2008.



Lack of transparency in the modus operandi of banks (especially in terms of debt levels; likes of Maddoff) and also the boom of the shadow banking system through which bad mortgages were financed (Geithner and Krugman point to these as the key issues)

Sub causes



Very high increase in commodity prices that followed the housing bubble: the price of oil moved from about 50 US $ in 2007 to about 147 US $ p/b in 2008. This helped constrict economic growth in oil importing countries. Also from start 2004 to 2008 price of a tonne of copper moved from 1600 to 7040 US $.



Some like Ravi Batra (systemic); John Bogle (huge exco compensation; manager’s capitalism; failure of gate keepers); Robert Reich (fall in wages of hourly workers 80% forcing debt accumulation) argue that the crisis is simply symptom of deeper structural and systemic problems faced by financial capitalism.

Summary of causes



The Phil Angelides Commission issued its report in 2011 and had very harsh conclusions: “the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system

• n a collision course with crisis; Key policy makers ill

prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.”

Summary of Causes by Congress



The Levin‐Coburn report revealed that the crisis was caused by high risk complex financial products; undisclosed conflicts of interests; failure of regulators and credit rating agencies; and failure of the market itself to control excesses of Wall Street.

Unpredicted ?



Some like Robert Shiller, Nassem Taleb and Nouriel Roubini predicted the crisis but Roubini was castigated by the likes of the Guardian and the New York Times.

Main Effects (US)?



In the US the DJIA peaked 14000 points in October

• 2007. Fell in 2008 and by March of 2009 was 6600

(more than 50% fall) but regained steam in 2011 and 2012 due to Fed actions.



From Jan 2007 to Sept 2009 US banks lost 1 trillion dollars of toxic assets due to bad loans. These figures sharply increased in post 2009 period.



Some of the banks failed or were basically seized by Government: AIG; Lehman Brothers; Wachovia, Citigroup, Washington Mutual etc.

Main Effects (US) ?



Huge bank runs and frozen lending; housing prices plummeted; retirement assets tanked. All placed at 8.3 trillion US $.



In US economic activity declined and by Oct 2009 unemployment was 10.1% the worst since 1983 and almost twice the rate before the crisis.

Main Effects (Beyond US)?



Derivatives and CDOs were bought and held globally. For EU banks first victim was Northern Rock that was eventually nationalized in 2008 by the UK Government. So there have been bank failures in Europe; decline in stock indexes and steep reduction in market value of equities.



Iceland suffered most in terms of the banking crisis and the effects have been hard.



Serious decline in GDP in many countries including 9.8% decline in 2009 in Euro area.



In developing countries growth also fell due in part to low demand from the West and also due to low levels of remittances all these leading to increased levels of those living below the poverty line.

Responses (US)?



General trend has been: fiscal stimulus, monetary policy expansion and bailout of institutions.



In September 2008 Bernanke and Paulson proposed 700 $ billion emergency bailout warning US law makers that failure to act posed an existential threat to US’

• economy. In October 2008 the Troubled Asset

Relief Program became law.



Under the Fraud Enforcement and Recovery Act (Public Law 111‐21) of 2009 signed by President Obama a Commission was created to investigate the causes of the crisis of 2007‐2010.

Responses (US)?



For the long haul, the Obama Administration embraced the Volcker Rule (tougher bank financial requirements and prudential standards; check on executive pay; control of derivatives and shadow banking and enhanced powers of Fed to wind down institutions too big to fail)



Adoption in July 2010 of Dodd‐Frank Wall Street Reform and Consumer Protection Act on Bank reform and financial regulation (which Republicans have vowed to repeal)

Responses Beyond the US ?



In Europe Basel III regulations were adopted amongst

• thers to reduce leveraging; reduce counter party

risks and introduced new liquidity conditions.



** The approaches used by Brazil especially in the context of the crisis can be summarized as: raising of the minimum wage; more capital controls (marked by 2002 national rather than international sale of bonds); very strong use of industrial policy to push foreign policy goals; aggressive use of the WTO and conservative monetary policy.

Popular Reactions to Responses ?



Occupy wall street and demonstrations against bankers: as the governments pumped money into the economy to boost spending the banks instead used the money to invest internationally especially in emerging markets and also in foreign currencies and in some cases pay executives bonuses

Real danger ?



Call for more stimulus have been led by Krugman but there are some (Buchanan and Smith) who believe that more stimulus will extend current account deficits and retard growth



In the throes of this sense of indecision as to what to do many fear that if the global economy fails to improve many economies may face sovereign default



Which leads us to the discussion on Euro zone sovereign debt crisis

Euro Zone Sovereign Debt Crisis



Causes (at the heart is threat of contagion in lack of confidence leading to higher price of sovereign loans)



Greece (FC affected its shipping and tourism industries and government borrowed even more to sustain public spending

• n wages and entitlements)



Portugal (decades long public spending and expensive civil service; spending on investment bubbles and external consultancies)



Ireland (Caused by government guarantee for six banks that financed property bubble that burst in 2007)



Cyprus (highly exposed to Greek debt; explosion of July 2011 and slow structural reforms)



Spain (housing bubble fuelled by private mortgage debt and increased government spending)

Euro Crisis Responses



EU level



European Financial Stability Mechanism (EFSM) is 60 billion euros pledge by EU members including 7.5 billion from the UK (Portugal and Ireland have benefitted)



European Financial Stability Facility (EFSF) (adopted May 2010) is a temporary fund for euro zone worth 440 billion euros). Activated

• n demand and has been used for Ireland and Portugal (200

billions) and Spanish banks (100 euros)



European Stability Mechanism will replace EFSM and EFSF in June 2013 as a permanent bailout fund worth 500 billion euros. To be a firewall and created after amendment of TFEU



Dec 2011 moves for a fiscal compact to enter in force Jan 2013 if 12 states in euro zone ratify but UK resisted plan to include these as treaty amendment



ECB: Draghi’s July 2012 statement pushes the markets

Euro Crisis: effects



Effects within EU



Increased unemployment levels



Austerity measures heightened (as bailout quid pro quo) and the serious impacts on the lives of citizens



Political changes in governments



Effects beyond EU



More aggressive trade strategy (IP; government procurement)



Reduced development cooperation money



Impact of slow EU economy on US, India, China

Challenges



Greece: Running out of money (dangers of euro exit**)



Portugal: bank runs especially if Greece leaves Euro zone



Ireland: In recession and hard to access capital markets so threat of a second bailout



Spain: recession and banks



Italy: Collapse of market confidence (threat of SB return)



France: Loans to Southern countries by French banks



UK: effect on euro break up and foreign bank loans



Germany: Euro break up (loss for German banks and losses in trade)

Impact of 2008 FC in specific sectors in other regions



Trade: fall in exports in all the regions;



Tourism: Constrictions in the Caribbean, South America and Africa; Thailand; Sri Lanka;



Infrastructure: major capital outflow in Central Asia; infrastructure spending in Africa curtailed; reduction in international commercial credit lines;



Agriculture: due to actions of Ukraine and Russia food problems in Africa

The WB and RFOs



Global: WB



RDBs: AfDB; ADB; IDB; EBRD



SRDBs: EIB; EDB; DBSA; EADB; CDB; WADB; CADB; BoS

Responses of the WB and RFOs



Global: WB



Initial proposal of a 0.7% bailout funds to poor countries



IDA



frontloading 3 year commitments to first 2 years;



2 billion IDA facility 

IFC



Infrastructure Crisis Facility (liquidity shortfall in ongoing projects in emerging markets);



renewed IFC advisory services;



3b$ IFC/Japan recapitalization Fund;



IFC 3b$ Global Trade Finance Program



German Government/WB: Microfinance Enhancement Facility.



RDBs:



AfDB



Led Africa wide initiatives to respond to Group of 10



Porfolio restructuring with emphasis on what works



Creation of Quick Disbursement Loan Facility (for countries in need)



Emergency Liquidity Facility with 1.5b$



500m$ Global Trade Liquidity Program and a 1b$ Trade Finance Initiative



Increase in advisory services



RDBs cont:



ADB



Incresase in funding for Trade Finance Facilitation Program from 150m to 1b$



Conference organized on the crisis in the region



Upward revision of lending trends



RDBs cont



IDB:



Emergency Liquidity Fund (6b$)



Increase in micro finance lending through the Multilateral Investment Fund



Increase support for SMEs through the Inter‐American Investment Corporation



Creation of Aid for Trade Strategic Fund (to phase out trade barriers)



Hike in credit guarantees and grant approvals from 250m$ to 12b$ in 2008



Increased concessionary lending to Bolivia, Guyana, Honduras, Nicaragua and especially Haiti (the debts of which were cancelled)



2010 board takes decision to increase bank capital of 70b$



RBDs cont:



EBRD:



Vienna Initiative of 2009 (worth 25b$) through the Joint Action Plan with EIB and WB



Recapitalization lending to commercial banks and buying up of vital stake (Parex Bank in Latvia)



2010 capital increase approved by board to support infrastructure projects: 64% increase in business volume in 2009 classified as crisis response



Envisage support for product diversification and transformation



In 2009 through its Trade Facilitation Program and guarantees it also financed 886 trade transactions worth 573 million euros

SRDBs



EIB



2010: increased lending by 15b euros



2.5b euros/ year to go to SMEs



6 b euros for infrastructure (energy and transport)



Creation of 2.5b euros convergence lending window



Capital increase approved from 67b euros to 232b euros 

EDB



Focus to be on projects with multiplicative effects



EDB to implement EURASEC Anti Crisis Fund (8.5b$)



Program of trade financing instruments (2010) 

CDB



Focused on Policy based lending aimed at restructuring client debt (100m$)



260 m$ investment lending mainly on infrastructure



78 m$ for the Basic Needs Trust Fund (to focus on SME and tertiary education)

SRDBs cont



DBSA



Targeted Infrastructure Program for poor municipalities



Expansion on research and advisory services



Through Siyenza Manje Program has hike capacity building and training



Increase in agriculture lending



EADB (losses incurred)



Restructuring and realization of arreas



Constrained by losses incurred

SRDBs cont



WADB



Has been seeking liquidity shore up from states



CADB



Slow debt repayment so cash strapped



IsDB



Offers a different finance model: riba and garathat proscribe excessive credit and speculation



5% hike in overall financing and 17% increase in project finance BOS: Still early to assess how members will back up commitments even if Venezuela paid in 500 m of its pledged 4b$

Summing up



Except for the EIB, BOS and DBSA, in those SRDBs with little or no involvement of countries of the North especially those from Africa, performance is mediocre



With few exceptions in the SRDBs there is emphasis in all the banks in the areas of trade finance and infrastructure



No serious discussion in any of the banks on changing the model of excessive lending and speculation that placed the system in problems (petrocaribe bartar? IsDB model?)



Emerging countries not translating clout into the activeness in RDBs: rather they want their own bank

Challenges and Prospects



Coordination



Averting duplication and needless competition



Consolidated annual meetings to ease efficiency (cost)



Constitutionally sound



2009 Tunis meeting of banks as way forward



Access to banks’ resources by the private sector (with exceptions of WB, some RDBs and the EIB)



Red tape: heavy bureaucratic systems in WB and the RDBs before accessing reources



Resources



Especially those from Africa (debt repayment)

Prospects



Need for greater coordination because responses still too disparate: WB cooperating with RDBs and specific RDBs with their SRDBs



Identifying alternative sources of financing especially for some SRDBs via SWFs and also proposed BRICS development bank

Thank You