AnEconomicAnalysisofFinancialStructure幻灯片.pptVIP

The Subprime Financial Crisis of 2007 - 2008 (cont’d) Crisis spreads globally Sign of the globalization of financial markets TED spread (3 months interest rate on Eurodollar minus 3 months Treasury bills interest rate) increased from 40 basis points to almost 240 in August 2007. The Subprime Financial Crisis of 2007 - 2008 (cont’d) Banks’ balance sheets deteriorate Write downs Sell of assets and credit restriction High-profile firms fail Bear Stearns (March 2008) Fannie Mae and Freddie Mac (July 2008) Lehman Brothers, Merrill Lynch, AIG, Reserve Primary Fund (mutual fund) and Washington Mutual (September 2008). The Subprime Financial Crisis of 2007 - 2008 (cont’d) Bailout package debated House of Representatives voted down the $700 billion bailout package on September 29, 2008. It passed on October 3. Recovery in sight? Congress approved a $787 billion economic stimulus plan on February 13, 2009. Dynamics of Financial Crises in Emerging Market Economies Stage one: Initiation of Financial Crisis. Path one: mismanagement of financial liberalization/globalization: Weak supervision and lack of expertise leads to a lending boom. Domestic banks borrow from foreign banks. Fixed exchange rates give a sense of lower risk. Banks play a more important role in emerging market economies, since securities markets are not well developed yet. Dynamics of Financial Crises in Emerging Market Economies Path two: severe fiscal imbalances: Governments in need of funds sometimes force banks to buy government debt. When government debt loses value, banks lose and their net worth decreases. Additional factors: Increase in interest rates (from abroad) Asset price decrease Uncertainty linked to unstable political systems Dynamics of Financial Crises in Emerging Market Economies Stage two: currency crisis Deterioration of bank balance sheets triggers currency crises: Government cannot raise interest rates (doing so forces banks into insolvency)… … and speculators expect a devaluatio