Maymester:Singapore Maymester 2015Information Session: October 28th

4-5 pm, VKC 300aOr contact Ashley Bonanno at bonanno@usc.eduApplication due Nov. 14th

Application Requirements:GPA above 3.2IR Courses:210, and on East Asia

Program Costs:4 units of Spring 2015 Tuition: $6408Room/Board: +/-$1300Airfare 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 18Guest: Bozovic

10/28/14

Lecture 18 3

Recap• Why did Mexico get into trouble?• IMF role in helping Mexico?• Today:– Asian Financial Crisis– Eurozone Crisis– Role of IMF

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Asian Financial CrisisForeign currency reserveshttp://www.youtube.com/watch?v=HiphWQfB6J0Using reserves to stabilize currencyhttp://www.youtube.com/watch?v=TZ7d5kjAlQw

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Asian Financial CrisisSpeculative attack on currencyhttp://www.youtube.com/watch?v=P2IWGlR1SHs&feature=relmfu

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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

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Epicenter: ThailandThe conditions mentioned before set the stage

for a speculative attack

Asian Financial Crisishttp://www.youtube.com/watch?v=lA3sjWwu5-s&feature=relmfu

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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

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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

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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

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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

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Consequences• Eventual devaluations• Unemployment soared, benefits cut• GDP plummeted (graph: GDP growth)• Banks closed

Parallels?

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Consequences in Thailand

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Model

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Eurozone Crisis• Why single currency?• What made the markets excited about

Greece?– Entry into the EU– Euro benefits– Signals potential future wealth

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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

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

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Eurozone• Consequences?• Why can’t they just print money?

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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

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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

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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