Presentation Transcript

1. My Big Fat Greek Crisis

   IASET October 13, 2011 Helen Roberts
2. Greece versus Illinois Both have beaches
3. Greece versus Illinois Both are known for architecture
4. Greece versus Illinois Both have persistent structural budget deficits. Illinois 2012 deficit would be $1317 per person (10/2010 projection).
5. What is the European Union, and why is the Greek crisis seen as bringing it down? Nobody says IL will break apart the US. http://europa.eu/index_en.htm http://europa.eu/quick-links/eu-kids/index_en.htm
6. 27 Member Countries
7. Member states of the EU (year of entry) Austria (1995), Belgium (1952), Bulgaria (2007), Cyprus (2004), Czech Republic (2004), Denmark (1973), Estonia (2004), Finland (1995), France (1952), Germany (1952), Greece (1981), Hungary (2004), Ireland (1973), Italy (1952), Latvia (2004), Lithuania (2004), Luxembourg (1952), Malta (2004), Netherlands (1952), Poland (2004), Portugal (1986), Romania (2007), Slovakia (2004), Slovenia (2004), Spain (1986), Sweden (1995), United Kingdom (1973)
8. EU Countries NOT on EURO As of the 1st of January 2011, 17 members of the European Union use the Euro. The 10 that do not are: United Kingdom BulgariaCzech Rep. Denmark Hungary Latvia Lithuania Poland Romania Sweden
9. Candidates for EU Membership Croatia Former Yugoslav Republic of Macedonia Iceland Montenegro Turkey
10. European Countries Not in EU Albania, Andorra, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Georgia, Liechtenstein, Moldova, Monaco, Norway, Russia, San Marino, Serbia, Switzerland, Ukraine, Vatican City State
11. One Currency versus Floating Exchange Rates: Optimum Currency Areas (Robert Mundell 1999 Nobel) 2 regions are considering a currency union: Market integrations and efficiency benefits versus economic symmetry and stability costs If markets are more integrated, net economic benefits from a currency union (lower transactions costs and reduced uncertainty) increase. If countries use the same currency, they lose monetary autonomy—must have same monetary policy and interest rates as others in that currency. If regions are very similar, so they potentially have the same economic shocks (symmetric shocks, not asymmetric) then cost of joining currency union goes down.
12. Dollarization A country adopts a foreign currency and plays no role in managing the common currency. Example: Panama uses the U.S. dollar Even when the adopted currency is not the U.S. dollar, the process is often called dollarization. Rare for multilateral currency unions like the Eurozone where all member countries participate in the monetary affairs of the union.
13. Symmetry-Integration Benefits of floating dominate: Sweden, UK Benefits of fixing exchange rate dominate: Denmark Benefits of full currency union dominate: United States Where does Eurozone fit?
14. EU compared with USA EU is not a federation like the United States. EU is not an organization for co-operation between governments, like the United Nations. The EU member states (countries that make up the EU) are independent sovereign nations. EU countries ‘pool their sovereignty’ in order to gain a strength and world influence none of them could have on their own. Pooling sovereignty means, in practice, that the member states delegate some of their decision-making powers to shared institutions they have created, so that decisions on specific matters of joint interest can be made democratically at European level.
15. EU Decision Making EU law is divided into 'primary' and 'secondary' legislation. The treaties (primary legislation) are the basis or ground rules for all EU action. Secondary legislation – which includes regulations, directives and decisions – are derived from the principles and objectives set out in the treaties.
16. Co-Decisions The EU’s standard decision-making procedure is known as 'codecision'. This means that the directly elected European Parliament has to approve EU legislation together with the Council (the governments of the 27 EU countries). The Commission drafts and implements EU legislation. The Treaty of Lisbon increased the number of policy areas where 'codecision' is used. The European Parliament also has more power to block a proposal if it disagrees with the Council.
17. Main Institutions of EU The EU's decision-making process in general and the co-decision procedure in particular involve three main institutions: the European Parliament, which represents the EU’s citizens and is directly elected by them; the Council of the European Union, which represents the individual member states; the European Commission, which seeks to uphold the interests of the Union as a whole.
18. European Central Bank The European Central Bank (ECB, based in Frankfurt, Germany) manages the euro – the EU's single currency – and safeguards price stability in the EU. The ECB is also responsible for framing and implementing the EU’s economic and monetary policy.
19. ECB Purpose keepprices stable (keep inflation under control), especially in countries that use the euro. keep the financial system stable – by making sure financial markets and institutions are properly supervised. The Bank works with the central banks in all 27 EU countries. Together they form the European System of Central Banks (ESCB). It also leads the close cooperation between central banks in the euro area – the 17 EU countries that have adopted the euro, also known as the eurozone. The cooperation between this smaller, tighter group of banks is referred to as the ‘Eurosystem’.
20. ECB Tasks setting key interest rates for the eurozone and controlling the money supply managing the eurozone'sforeign-currency reserves and buying or selling currencies when necessary to keep exchange rates in balance helping to ensure financial markets and institutions are adequately supervised by national authorities, and that payment systems function smoothly authorising central banks in eurozone countries to issue euro banknotes monitoring price trends and assessing the risk they pose to price stability.
21. US Federal Reserve Dual Mandate 2 key objectives for monetary policy--maximum employment and stable prices--in the Federal Reserve Act. These objectives are sometimes referred to as the Federal Reserve's dual mandate,the long-run goal for monetary policy. Congress established the Federal Reserve as an independent agency. This is critical to guaranteeing that monetary policy decisions are free from political influence and focused exclusively on achieving the Federal Reserve's dual mandate.  A problem experienced in many countries without an independent central bank is that elected officials have put pressure on monetary policymakers to follow policies that boost the economy in the short run even if doing so would result in high levels of inflation later on.
22. EU Economy With 12 new member countries joining since 2004, the EU’s GDP — output of goods and services — is now bigger than that of the US: GDP (€12.2684 trllion2010) 1.33 dollars per euro, so EU GDP in dollars was $16.3170 trillion GDP—the value of all of the goods and services produced in the United States—in 2010 was $14.5265 trillion.
23. EU International Trade With just 7% of the world’s population, the EU's trade with the rest of the world accounts for around 20% of global exports and imports. The EU is the world’s biggest exporter and the second-biggest importer. Around two thirds of EU countries’ total trade is done with other EU countries. The United States is the EU’s most important trading partner, followed by China. In 2005, the EU accounted for 18.1% of world exports and 18.9% of imports.
24. Production and Trading Partners EU and U.S. together account for 40% of total global trade. The intertwined economies employ 12-14 million workers on both sides of the Atlantic. Europe is by far the most significant source of foreign investment in the US economy.
25. US International Trade in Dollars http://www.census.gov/foreign-trade/statistics/highlights/top/top1012yr.html Top US Trading Partners (72-75% of trade accounted for by top 15 countries) Total Trade in Goods, Euro countries in top 15: Germany (5), UK (6), France (8), Netherlands (11) Exports: UK (5), Germany (6), Netherlands (9), France(11), Belgium (14) Imports: Germany (5), UK (6), France (8), Ireland (10), Italy (15)
26. EU-US Trade Trade in goods EU good exports to the US in 2010: €242.1 billion EU goods imports from the US in 2010: €169.5 billion Trade in services EU services exports to the US 2010: €125.2 billion EU services imports from the US in 2010: €131.0 billion Foreign Direct Investment EU investment flows to the US in 2009: €79.2 billion US investment flows to the EU in 2009: €97.3 billion Investment stocks inward in 2009: €1044 billion Investment stocks outward in 2009: €1134 billion
27. International Crises 101 Financial Crisis Credit Crisis Currency Crisis Sovereign Default Contagion
28. Financial Crisis Some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial crises directly result in a loss of paper wealth; they do not directly result in changes in the real economy unless a recession or depression follows.
29. Credit Crisis Financial institutions issue or are sold high-risk loans that start to default. As borrowers default on their loans, the financial institutions that issued the loans stop receiving payments. This is followed by a period in which financial institutions redefine the riskiness of borrowers, making it difficult for debtors to find creditors.
30. Currency Crisis, also called Balance of Payments Crisis Sudden devaluation of a currency caused by chronic balance-of-payments deficits Occurs when the foreign exchange value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. Currency crises usually affect fixed exchange rate regimes, rather than floating rate regimes. Recessions attributed to currency crises include the 1994 economic crisis in Mexico, 1997 Asian Financial Crisis, 1998 Russian financial crisis, and the Argentine economic crisis (1999-2002).
31. Sovereign Default Failure by the government of a sovereign state to pay back its debt in full. If potential lenders or bond purchasers begin to suspect that a government may fail to pay back its debt, they may demand a high interest rate in compensation for the risk of default. A dramatic rise in the interest rate faced by a government due to fear that it will fail to honor its debt is sometimes called a sovereign debt crisis. Governments may be especially vulnerable to a sovereign debt crisis when they rely on financing through short-term bonds, since this creates a situation of maturity mismatch between their short-term bond financing and the long-term asset value of their tax base. They may also be vulnerable to a sovereign debt crisis due to currency mismatch if they are unable to issue bonds in their own currency, as a decrease in the value of their own currency may then make it prohibitively expensive to pay back their foreign-denominated bonds
32. Contagion A crisis in one part of global capital markets triggers adverse changes in market sentiment in faraway places. Some economists consider this evidence of market inefficiency or irrationality. Example: investors revised their risk premia sharply upwards for Argentina in response to crises in Mexico (1994), Asia (1997), when there were no major changes to Argentine fundamentals during these crises.
33. Walk through May 2010 Analysis of What Greek Crisis means for Manhattan Real Estate Aggregate demand down and fiscal drag in Europe; slowing trade flows Reallocation of capital from weaker to stronger in Eurozone Volatility in financial markets and wider credit spreads Investors move away from stocks to bonds Euro declines What has happened over the past year?
34. World Output Growth (UN World Economic Situation 2011), % 2006 2007 2008 2009 2010 2011 2012 World 4.0 3.9 1.6 -2.0 3.6 3.1 3.5 Developed 2.8 2.5 0.1 -3.5 2.3 1.9 2.3 Eurozone 3.0 2.8 0.5 -4.1 1.6 1.3 1.7 Japan 2.0 2.4 -1.2 -5.2 2.7 1.1 1.4 UK 2.8 2.7 -0.1 -4.9 1.8 2.1 2.6 US 2.7 1.9 0.0 -2.6 2.6 2.2 2.8 World Trade 9.3 7.2 2.7 -11.4 10.5 6.6 6.5 http://www.un.org/en/development/desa/policy/wesp/wesp_current/2011wesp_prerelease1.pdf
35. Fiscal Drag
36. International Capital Flows Capital flows resumed after the 2010 crisis. http://www.scribd.com/doc/53986940/IMF-World-Economic-Outlook-April-2011
37. TED Spread Widening  TED spread measures the difference between the interest rates on US T-bills (thus the 'T') and interbank loans (or LIBOR, represented by Eurodollar futures or the "ED" ticker on the CME). When the spread widens, it means investors are nervous aboutcredit risk and the possibility of defaults, sending LIBOR rates higher and T-bill rates lower.Not surprisingly, given recent trends and the Eurozone crisis, the Ted spread increased Oct. 11, 2011 to just below 37 basis points, much higher than the safer 20 to 25 basis points range we saw in the spring. The spread is still nowhere near the highs it reached in 2008, when it once soared above 450 basis points, but the uptick means that investors are increasingly fearful about the big events able to rock global markets, like the future of the Eurozone bailout,volatility, and the fast-approaching US 'super committee' deadline.
38. Standard & Poor's 500 Index History ChartJanuary 1, 1953 Through August 12, 2011
39. Euros per US Dollar Forex Chart
40. Links on How the Greek Crisis affects US http://www.youtube.com/watch?v=aM4q0Uh4sQQ “Ask Steve” talks with River City Bank President (Sacramento) explains basics in 3 minutes. http://www.cmegroup.com/education/files/my-big-fat-greek-debt-crisis-1.pdf CME Group looks at 2010 crisis and implications for traders http://www.cmegroup.com/education/files/my-big-fat-greek-debt-crisis-2.pdf CME Group looks at 2011 crisis and (compared with 2010 crisis) looks at implications for traders. http://theapplepeeled.com/economics/my-big-fat-greek-crisis-w hat-european-troubles-may-mean-for-the-nyc-housing-market/ Example of reasoning for the Greek crisis affecting US housing market (NYC). http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2011/cflnovember2011_292.pdf Chicago Fed summary of international financial regulators cooperating after the financial crisis http://www.chicagofed.org/webpages/publications/chicago_fed_letter/2011/october_291b.cfm http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2011/cflmay2011_286a.pdf http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2009/cflaugust2009_265.pdf Rick Mattoon Chicago Fed Letters on State and Local Government Financial Situations and whether the federal government should bail out states http://www.chicagofed.org/webpages/publications/chicago_fed_letter/2011/may_286a.cfm Video with Rick Mattoon talking about background to Fed Letter