The Good, The Bad, and The Ugly The Global Financial Crisis The Good, The Bad, and The Ugly The Global Financial Crisis

The Good the Bad and the Ugly Those requiring a bail out, and those loaning money – The Good Similarities: Low to no debt, exporting base, solid banks, prudent lending Examples include Canada, India, China, Australia, Germany, and Saudi Arabia to name the major ones. – The Bad Those countries that have experienced a bailout Require lender of the last resort (domestic and/or IMF). Insolvent, or too big to fail banks with toxic assets. Took on large risk, and most have had a housing bubble. Examples U.S., Iceland (past) – The Ugly Future or current bailouts Those countries currently experiencing financial meltdown E.g. Ireland poster example (Possibly Portugal and Spain and more in the not so distant future.... )

First Country to collapse in the GFC, October 2008 In 2004 the economy moved to a transaction based economy on three large banks that expanded across Europe and the U.K. The housing market boomed, as debt could be sold through U.S. CDOs with a high rating, AAA. Icelandic Banks offered higher returns to European depositors and lenders. Insurance deposits existed, but were inadequate to cover liabilities. Banks grew to over $ 140 billion Deficit from foreign investment was negative 125 percent GDP! Bubble burst, October 2008, markets lost trust in Icelandic banks: Lending stopped and deposits withdrew. Bank run hits Iceland, spreads across the U.K. All three large banks failed. Banks were too large for government to insure. November 19, 2008, a $6 billion economic stabilization program supported supported by the IMF and individual countries. Iceland today: IMF said the NOV 14, 2010, relief should be given to the homeowners in order to prevent more foreclosures, but economy is stable.

China avoids GFC – Prudent lending – Large inflow of capital investments – projected growth of 9% Before the crisis China maintained a high savings rate, leading to a surplus which was used to buy U.S. Government securities, lending us $900 billion to date. China’s domestic demand increased filling void created by U.S. recession. Chinese exports decrease from 40 to 20 percent over the past decade. China Attempts to keep currency artificially low to increase exports. IMF warned China such action may result in unstable growth. QE2 will increase the amount of dollars in the U.S. economy which, decreases the value of the dollar effectively making Chinese exports more expensive. Since China relies on U.S. demand any appreciation of their currency will make Chinese goods more expensive to American consumers.

Comprised of lender savers whose contributions to the global pool of money were second only to China. German international banks ended up owning much of the toxic assets produced by the U.S. housing market. In GFC, the German government was able to fund a rescue package so that they did not need EU support. Euro problem » Shared currency/Interest Rate/Exchange Rate for very different countries Germany: 8% unemployment / $175 Billion Surplus Ireland: 13.6 % unemployment / $75.4 million SURPLUS Spain: 19% unemployment / $84 Billion Deficit Germany would have a higher D-Mark and appreciating currency, but is held to the EU policies. Spain would require long term low interest rate and devalued Peseta in order to stimulate their economy. The EU will increase the interest rate, but the effect will be very different for different countries.

Housing Bubble and banking crisis much like the U.S. The Anglo Irish Bank (Worst) was nationalized, and the Nationwide Building Society both required 40 billion Euros in order to bail them out. That is 25 percent of Ireland’s GDP. Problem: To clean up the banks Ireland needed a plan similar to TARP. Government ran a large deficit in attempt to save their banking system, and guarantee sovereign debt. IMF and foreign bondholders owning bonds in the form of sovereign debt, stepped in and forced budget cuts and raised the pension age to lower the Irish deficit. Problems remain: Ireland has no influence on Euro zone exchange rate, and increases to the exchange rate will dampen a recovery.

IRISH EQUITY MARKET

GLOBAL REFORM

KEY BAILOUT MONEY THE BAD & THE UGLY THE GOOD