Maymester:Singapore Maymester 2015 Information Session: October 28 th 4-5 pm, VKC 300a Or contact Ashley Bonanno at 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 3Lecture 18

Asian Financial Crisis Foreign currency reserves J0 Using reserves to stabilize currency w Lecture 184

Asian Financial Crisis Speculative attack on currency Hs&feature=relmfu Lecture 185

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 186

Epicenter: Thailand The conditions mentioned before set the stage for a speculative attack Asian Financial Crisis s&feature=relmfu Lecture 187

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 188

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 189

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 1810

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 1811

Consequences Eventual devaluations Unemployment soared, benefits cut GDP plummeted (graph: GDP growth) Banks closed Parallels? Lecture 1812

Consequences in Thailand Lecture 1813

Model Lecture 1814

Eurozone Crisis Why single currency? What made the markets excited about Greece? – Entry into the EU – Euro benefits – Signals potential future wealth Lecture 1815

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 7 th largest economy Fears among investors IMF does not have enough money to bail out Europe Lecture 1816

Eurozone Consequences? Why can’t they just print money? Lecture 1817

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 1818

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 1819

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 1820