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THEORY OF FINANCIAL CRISES Elective M1, FINANCIAL ECONOMICS TRACK ACADEMIC YEAR 2012 / 2013

THEORY OF FINANCIAL CRISES Elective M1, FINANCIAL ECONOMICS TRACK ACADEMIC YEAR 2012 / 2013. Professor : Nikolay NENOVSKY. Theory and History of Financial crises. Pr Nikolay NENOVSKY University of Picardie Jules Verne Former Member of Bulgarian Central Bank Governing Council.

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THEORY OF FINANCIAL CRISES Elective M1, FINANCIAL ECONOMICS TRACK ACADEMIC YEAR 2012 / 2013

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  1. THEORY OF FINANCIAL CRISES Elective M1, FINANCIAL ECONOMICS TRACK ACADEMIC YEAR 2012 / 2013 Professor: Nikolay NENOVSKY

  2. Theory and History of Financial crises Pr Nikolay NENOVSKY University of Picardie Jules Verne Former Member of Bulgarian Central Bank Governing Council EDHEC, Nice, May 2013 EDHEC May 2013

  3. II Discussion: on the causes on the policy on the prevention EDHEC May 2013

  4. Real economy shocks Global balances/disequilibria, geopolitical changes Regional (EU) balances/disequilibria National balances/disequilibria, national macroeconomic policies Monetary shocks Monetary policy Financial markets instability (liberalization) Financial regulation/regulatory failures Modern financial theory/risk management Three main explanations/Three triggers… EDHEC May 2013

  5. Instability of real variables/factors … Consumption/Saving/Investment Keynes/Hayek Productivity/Competitiveness/Labour costs Innovation/IT chocks Natural resources/Demography National level/Regional (EU) level/Global level (China/USA) Real economy factors EDHEC May 2013

  6. Easy monetary policy, low interest rates (FED) Low risk premium…. Lending boom/Different bubbles Overbrowning/High debt leveraging Global capital movements….. Monetary factors EDHEC May 2013

  7. Instability of financial markets Moral hazard/Asymmetric information Coordination failures/Financial regulation/Regulatory failures Universal banking/Securitization/Derivatives disasters (mixing saving with credit/real investments with derivatives …)…. Poor risk management… Failures of modern finance theory (VAR, sigma problem ) Financial markets capture by vested interests …. Financial markets liberalisation EDHEC May 2013

  8. Who is to blame for the disaster? Who is responsible for the mess ? 1) Market Financial instability, lack of regulation, regulatory failures Excessive risk taking, FM are short-sighted, heard behavior Globalization …. 2) State/Government State guaranties, insurance, moral hazard Central bank monetary policy Public expenditures/debts Suppressed domestic consumptionin China, lack of liberalisation in China Two ideological statements EDHEC May 2013

  9. First explanation Real economy factors… EDHEC May 2013

  10. Global level USA position (…world debtor…) China, Emerging Markets, Russia, Arab oil producers (…world creditors…) Regional level/EU level EU Periphery/South Europe EU Core/Germany /North Europe ……………. Eastern Europe Global and regional balances EDHEC May 2013

  11. Debt is inter-temporal consumption choice (individual/national) under budgetary constraint Suppose in t1 C1 > Y1, you can use Debt = C1 – Y1 But in t2 you need (Y2 > C2), to repay Y2 – C2 ≥ (1+i) Debt Residents /Nonresidents Debt accumulation (or) foreign reserves accumulation = CA = = (X - Imp) = (S - I) + (T - G) NFA = Foreign assets – Foreign liabilities = CA Inter-temporal debt constraint … EDHEC May 2013

  12. Debt sustainability EDHEC May 2013

  13. Domestic (R/R) Public/Private External (Foreign) debt (R/NR) Public/Private (corporate, banks…) ……. Long term/Short term Currency denomination//”original sin” problem… Fixed/Variableinterest rates Debt structure… EDHEC May 2013

  14. Behaviors at national level of real variables: C, S, I behavior G behavior Portfolio behavior (search for safety assets in Emerging markets/China…); Insurance against shocks via reserves accumulation… Both private and public patterns/decisions Global balances EDHEC May 2013

  15. Good/bad distortions Good – if reflects voluntary individual and group preferences/behavior (S, I, portfolio composition etc…) Bad - if these preferences are manipulated, ex: exchange rate misalignment, oil price, government interventions … Global balances EDHEC May 2013

  16. Who is guilty, where is the deepest cause of the crisis ? • Global level • USA deficit or Chinese/Emerging markets/oil producers surplus ? (debtors/creditors) • EU level • South Europe deficit or North (German) surplus? EDHEC May 2013

  17. EDHEC May 2013

  18. EDHEC May 2013

  19. EDHEC May 2013

  20. EDHEC May 2013

  21. Back …. EDHEC May 2013

  22. EDHEC May 2013

  23. S and I in % of GDP EDHEC May 2013

  24. S and I in % of GDP EDHEC May 2013

  25. S and I in % of GDP EDHEC May 2013

  26. Historical perspective (CA volatility) EDHEC May 2013

  27. Global imbalances (volatility and dispersion) EDHEC May 2013

  28. EDHEC May 2013

  29. EDHEC May 2013

  30. EDHEC May 2013

  31. EDHEC May 2013

  32. Before: From rich to poor countries… XIX century Railways Investments Latin America/Russia … Now: From poor countries to rich Return of I should be higher in poor countries… But uncertainty, risk… China: US Bonds/now FDI (equity)/takes control/ownership, firms and banks accusations … (… Greece, EU ) Global capital movements EDHEC May 2013

  33. World capital inflows and outflows 1996-2008 EDHEC May 2013

  34. EDHEC May 2013

  35. Foreign reserve accumulation… EDHEC May 2013

  36. NFA in % of world GDP EDHEC May 2013

  37. EDHEC May 2013

  38. EDHEC May 2013 EDHEC, Nice, April 2011

  39. EDHEC May 2013

  40. EDHEC, Nice, April 2011 EDHEC May 2013

  41. EDHEC May 2013

  42. EDHEC May 2013

  43. EDHEC May 2013

  44. Gross external debt to GDP ratio EDHEC May 2013

  45. EDHEC May 2013

  46. USA , EU periphery high C and I boom, low propensity to S, public deficit public deficits (G -T ) > 0 CA deficit (Imp – X) > 0 China, North Europe/Germany/oil countries – surplus public surplus (G -T ) < 0 CA surplus (Imp – X) < 0 Russia, Brazil, India (…BRIGS) Global imbalances/To sum up … EDHEC May 2013

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