1. Bertrand Candelon Financial Crises Analysis 1Studium general - 06/10/2011

2. Sequence of the Sub-Prime crisis: 1. US Housing Market Collapse. 2. Bank distress: US-Europe-ROW. 3. Stock Market Crash. 4. Economic Recession. 5. Sovereign Debt Crisis.….. 2

3. The strongest crisis since 1929? The same causes, the same errors ? Where do we go? Studium general - 06/10/20113

4. 1 - What is a financial crisis? 2 - The origins of the crises. 3 - Crisis Mutation 4 - The Current crisis. 5 - A European Crisis 4Studium general - 06/10/2011

5. 1- What is a financial crisis? 1. Wikipedia: ” Situation, when money demand exceeds money supply”. Temporary event. Liquidity problem. 2.Frederic Mishkin: ”Nonlinear disruption,..., so that financial markets are unable to channel funds to those with the most productive investment opportunities.”. Several markets involved. Role of the banking sector. Jumps ! Speculative attacks 5Studium general - 06/10/2011

6. 6 Stock markets crisis Currency crisis Banking crisis Sovereign debt crisis … Food crisis, Political crisis

7. Financial Crisis: a growing and more severe problem for the world economies ? No,…. - Globalization leads to a better risk diversification. - Better economic education. - More efficient prudential rules (Basle). - Information better widespread. 7Studium general - 06/10/2011

8. Yeah,…. - Capital highly mobile. - Financial products (hedge,..) have widespread the risk but not removed it. 8Studium general - 06/10/2011

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10. 2- The origins of the financial crises. Fundamental based crises Macro- and Micro fundamentals. 10Studium general - 06/10/2011

11. . Non-fundamental-based crises - Self-fulfilling propheties. - Contagion - Moral hazard. 11Studium general - 06/10/2011

12. 3- Crisis mutation. Flood and Garber (1984) – Currency Crisis - Economic relationships (UIP, PPP,..) on flows - But also accounting relationship extracted from the central bank balance sheet. R + DC = Ms A crisis occurs when R=0. 12Studium general - 06/10/2011

13. . Balance sheet Approach (Rosemberg at al. 2005 ) 13Studium general - 06/10/2011

14. . The subprime crisis explained via the BSA. Real estate bubble – non-financial BS Then financial sector BS --- Banking crisis Then Government BS --- Sovereign debt crisis Then…. Resurgence banking, currency,.. 14Studium general - 06/10/2011

15. . Empirical analyses. - From currency to banking crisis: Glick-Hutchinson (1995), Bordo et al. (2001),.. - From banking to sovereign debt: Reinhart-Rogoff (2009) Candelon-Palm (2010) 15Studium general - 06/10/2011

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18. 4- The Current crisis History 1/ - Business cycle turning point in early 2007. - Real estate bubble explodes. - Financial institutions faced liquidity problem (Northern Rock, Bear Stearn, Freddy Mac, Fanny Mae,…) - Bankruptcy of Lehman brothers. Sept 15 th, 2008 - Systemic Banking crisis 18Studium general - 06/10/2011

19. - Irrational reaction of stock markets, which crashed. - Several financial institutions in Europe faced liquidity problems (fortis, dexia,..). Nobody believe anymore in the IFS. - Uncoordinated reaction of governments (Paulson’s plan, recapitalization, nationalization) - G20 meeting to restore credibility. 19Studium general - 06/10/2011

20. History 2/ - Real economy collapse since 2009. - Public finance, austerity measures. - Greek default. - Distress of the €, banking sector weakness,.. 20Studium general - 06/10/2011

21. The origins of the crisis 1-. Business cycle turnpike.. Bad banking management and governance: Scandals ( SoG, CL,..), not enough diversification, too complex financial products. 21Studium general - 06/10/2011

22. The crisis becomes irrational with the bankruptcy of Lehman brothers. Why? Incoherent political reaction (Paulson’s plan by the US congress, or the absence of coordinated EU reaction) 22Studium general - 06/10/2011

23. The origins of the crisis 2-. Bad macroeconomic fundamentals (important debt, global disequilibrium). Political incompetences leading to a status quo (on financial regulation –CRA-, on decisions,..) -. Procyclical fiscal policies (banking safety plans,..) 23Studium general - 06/10/2011

24. Political Crisis (in particular Europe ) The markets and investors do not believe anymore politicians Studium general - 06/10/201124

25. What is the situation in October 2011?. Financial markets: quiet until July 2011, loose more than 25% last 3 months…. Sovereign bonds markets: extremely huge spreads for Greece, Italy -- unsustainable 25Studium general - 06/10/2011

26. . Real Markets - Disastrous GDP growth at 0%. Unemployment increases. Debt level and budget deficit will still deteriorate with austerity – Deflation is around the corner 26Studium general - 06/10/2011

27. 5- the European crisis. From a Banking crisis to a sovereign debt crisis.. From a sovereign debt to a currency crisis (to the end of € ?).. From a sovereign debt to a political crisis 27Studium general - 06/10/2011

28. . 2009. Loss of Credibility in the European Area. Sovereign Debt crisis. 2010. Threat on the euro (will it still exist in this form?) and depreciation with respect to the US$ Currency crisis ? banking crisis (Dexia) ? ---- vicious circle ? 28Studium general - 06/10/2011

29. Sovereign debt crisis ? 29Studium general - 06/10/2011

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32. . French and German banks highly involved In PIIGS BIS (2009) Greece SpainIrelandItalyPortuga l Total. Capital & reserve French b.75.2219.660.3511.444.7579.3 German b.45.0237.9183.8189.747.4565.2 32Studium general - 06/10/2011

33. Depreciation of the Euro vis a vis of other currencies is the next step, if Euro still exist… 33Studium general - 06/10/2011

34. Policy recommendations: - Fiscal Policy (SGP and its implementation, the ESF and fiscal federalism). Avoid deflation.. - Monetary Policy: Role of the ECB (not quasi fiscal operations). - Exchange rate stabilization: A Future for Euro? - Debt restructuration (Greece) – exit option. 34Studium general - 06/10/2011

35. Political Decisions have to be quickly taken. Within Europe: Eurobonds, restructuration of the Greek debt, fiscal policy coordination,... In the world: Intervention of the BIRC, IMF,... For a new world order. 35Studium general - 06/10/2011

36. Conclusions My vision of the future: Pessimistic -2012: election year – expect no courageous political decision. -On the edge of deflation (brain drain,..) -Crisis almost out of control. Studium general - 06/10/201136