2013 10-20 possibles scenarios of crisis mif-15' v12
TRANSCRIPT
Financial Crisises
The Uncertain Future of the Modern World
NESNewEconomicSchool
Berkausov AntonBondar SvetlanaDunaev IlyaKondratovich DmitriiKurbatov ConstantineMikheev Petr
Financial Crisis
Financial crisis —A situation in which the value of financial institutions or assets drops rapidly.
Banking panics Recessions Stock market crashes Burst of financial
bubbles Currency crises Sovereign defaults
Financial Crisis
What is going on?
Macroeconomic risks remain unchanged, but global activity has become more uneven and is projected to expand only modestly in 2014.
Emerging market risks have increased as the result of weaker growth prospects and rising domestic and external vulnerabilities.
Market and liquidity risks have increased as markets adjust to prospects of reduced monetary accommodation with implications for asset prices.
Risk appetite has contracted, resulting in reversals of capital flows to emerging markets.
Monetary and financial conditions remain broadly accommodative, as lending conditions have improved, but emerging market risk premiums have risen.
Credit risks are broadly unchanged, reflecting the uneven progress in balance sheet repair and pressures on euro area banks.
SWOT Analysis
Negative Positive
Internal Factors
• The sovereign debt crisis in Europe• Slowing of economies is the cause of
high volatility of energy supply/demand (derivatives)
• The evolving of building bubble in China (overheating of the economy, where growth is not supported by real demand)
• The concentration of derivatives in the hands of the major players (systemic risk)
• Increased quality of risk management (BASEL-III)• Investors are dismayed• Improving the regulation of markets• Increasing investment in Africa• The real easing of the monetary policy in Europe• Expansion of the WTO — less chance of erecting
trade barriers• Policymakers are interested in preserving the
Eurozone• There is a gradual deleverage in the markets• Scientists macroeconomists are at the head of
Central Banks in the leading countries• Slow but real growth in the U.S. (the World
major)
External Factors
• Shale sources may be overvalued• Crop failure• Major war in the Middle East (Israel)• The aging of the population• Cancellation of offshore opportunities
• Technical progress (new sources of demand)• Climate warming provides new sources of energy
and new features (for example: Northern Sea Route, oil & gas)
Crisis Scenarios
Flight to Quality:Fixed Income Bubble Burst
Distrust in Europe:Lack of Refinancing
Flight to Quality 1. Fixed Income
Bubble Inflation
US Government targeted to:
Decrease unemploymentStimulate economical growthDecrease inflation
US Treasuries dumped over last 6 years
As a result capital flew into risk
Increasing prices of high yield bonds stimulated further growth of the bubble
High yield bonds rates decreased
October 1, 2007
October 1, 2013
October 1, 2007
October 1, 2013
www.bloomberg.comGlobal Debt doubled over past 10 years from $78 trn in 2000 to $158 trn in 2010Debt grew faster than GDP: Global Debt/GDP=218% in 2000 and 266% in 2010$48 trn of the growth is due to the governments debt and financial institutionsGovernment debt was the fastest growing category (increased by $25trln)But financial institutions debt was larger class (increased by $23 trn)Unsecuritized lending is still the largest component of all debt and grows futher
Flight to Quality 1. Fixed Income
Bubble Inflation
National governments injected liquidities in banks which are not willing to invest in real economy and invest it in financial industry further inflating the bubble.
SPX VIX index (implied volatility of options on S&P 500) and S&P 500 look very similar to 2007 pattern
CBOE S&P 500 3-Month Volatility Index (VXVCLS) is relatively low www.stockcharts.comwww.bloomberg.com
Flight to Quality 2. Fixed Income
Bubble Burst
USA is close to the targets:
Decrease unemployment (target is 6%)
Stimulate economical growth
Stable above zero inflation (Fed’s target is 2%)
QE ending induces flight to quality:
Investors close out speculative positions and
move funds in developed countries reducing
liquidity and refinance, which will induce
currency crises and high yield bonds defaults.
These defaults will break a meaningful gap in
accounts, which will force selling high liquid
assets to cover these gaps. It will ignite the new
stage of world financial crisis due to rapid price
fall...
Sources: Labor Department (consumer prices, wages); Commerce Department (PCE prices); Labor Department via the Federal Reserve Bank of St. Louis (initial claims). The Wall Street Journal
Source: The Wall Street Journalhttp://www.economonitor.com
www.financialsense.com
www.eia.gov
Distrust in Europe
Risk factors: The heterogeneity of the European
economy Source of financing - banks (not the
stock markets in the U.S.) Inability to stimulate economic
growth in the peripheral countries - due to regulatory and taken "educational measures" (exit from the Euro?)
Distrust in Europe
Now Investors believe that ECB will coupe with PIIGS
If the policymakers of problematic countries do not find solutions (at a minimum, will increase labor productivity) for sustainable economic growth in their countries, it would disappoint investors will stop refinancing these countries
If these countries will default it will throw many of big European banks into deep troubles.
These banks will be forced to sell good assets to cover loses (ECB cannot cover such big loses without provoking high inflation)
Distrust in Europe
Distrust in Europe
New regulations will slow down aggressive credit activity inducing:
High yield bonds defaultsLiquidity crisis Lack of refinancingDecrease inflation
Sovereign default of the South Europe
Such default will impose huge losses of capital in big European banksThe main flaw — there is no one know what bank or funds will sunk (powered by unsecured CDS)Credit crunch and bank runDeep recession due to tough money market
Things will work out!!!
Anti-crisis measures include: 1. Investments, funding programs, decrease of rates, tax
reduction, demand regulatory actions2. Infusion of new money and support to important banks,
corporations, financial institutions which are in trouble. 3. Reforms and acts
*1) http://timesnet.ru/economy/789/*2) Мировая экономика: глобальный финансовый кризис - Бураковский И.В.
Coordination
Coordination between financial institutions and
development of cure mechanisms and preventive
measures (ЕС and G-20)1
Operational
Implementation of anti-crisis measures an follow-
up control on all levels (IMF, ECB, etc.)2
MEASURES
Long term — Reforming
US:1. December 11, 2009 – House cleared bill H.R.4173 – Wall
Street Reform and Consumer Protection Act of 2009.2. On April 15, 2010 – Senate introduced bill S.3217 –
Restoring American Financial Stability Act of 2010.3. On July 21, 2010 – the Dodd–Frank Wall Street Reform and
Consumer Protection Act was enacted.
EU: 4. European Stability Mechanism (ESM) -permanent rescue
funding program5. Basel III regulations for banks 6. European fiscal union7. Wealth tax8. Eurobonds9. European Monetary Fund
Things will work out!!!
Short term measures (applied already):1. Liquidity injection support of domestic demand/reboot of
economic processes/to avoid credibility gap 2. Decrease of the basis interest rate
Thank you for your attention!
MiF 2015