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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 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 EDHEC, Nice, May 2013 EDHEC May 2013
Phase II Countries notes EDHEC May 2013
Dynamics of the CDS in New Member States EDHEC May 2013
Greece • Low public finance discipline, statistical falsifications, crony capitalism … • 2010/2011/2012/ rescues measures • Deficit 9-10%, Debt 170% • GDP decline 7%, unemployment 20% • 130 bn Euro bailout by Eurogroupe • Debt restructuring, new 30 y bonds (coupon 2% to 2015, and 3% to 2020) • Need of 30% cut in all internal prices, wages to restore competitiveness (internal devaluation) • 60% (45%) primary surplus is need to avoid debt spiral… EDHEC May 2013
2013 EDHEC May 2013
CDS Greece (banks and sovereign) EDHEC May 2013
Greece crisis/ two views (Germany versus France) EDHEC May 2013
Ireland (Celtic tiger) • Export led growth, fixed exchange rate (1990-2001) • IT, dotcom bubble (1999-2002) • EU funds/low ECB interest rates (2003, 2%) • Construction bubble (2003-2007), bubble crash, private debt crisis, banking crisis (costs = 40% GDP) • Private debt became public, bank nationalization in 2008, SPV(bank hospital) (debt from 25% to 110%/deficits 13%) • Banks downsizing and strengthening ……………………………. • Structural measures (troika, EU/ECB/IMF) • Emergency Liquidity Assistance (ELA) EDHEC May 2013
Others Claims/ECB/ELAs (bn €) EDHEC May 2013
Portugal • Public debt 110% (deficit 5%) • Public spending cut by 20% • Wages cut/13/14 salaries… • Labour regulation flexibility • Strikes …. • EU bailout/IMF/ECB, May 2011 EDHEC May 2013
…low saving ratio/more debt… EDHEC May 2013
Spain • Real estate market fast growth (German banks !) • Housing bubble burst, private debt, banking crisis… • Deficits 9% (regional governments, local saving banks), Debt 80% • 25% unemployment, 50% youth • Banking recapitalization/mergers • Provisions to clean up their balance sheets, reducing real estate portfolios (380bn property and construction overhang = 35% of GDP) • Popular Party/Harsh austerity measures • Over 6% 10yr bond yields • Danger of contagion …. EDHEC May 2013
Others countries … • Italy • Public debt 120%, deficit 4% • Mario Monti reforms versus vested interests and trade unions • Budgets cuts, labour reforms • …………. • France ? • Belgium ? • Eastern Europe (Hungary, Latvia (successful adjustment !!), Slovenia, Romania…) EDHEC May 2013
Others countries … • Cyprus • Two banks (Russian deposits/claims on Greek banks …) • Banking sector assets 8 times GDP … • 10 bn bailout/IMF… • Creditors/depositors paid, or received shares … • Unemployment 15% • GDP drop 10%... EDHEC May 2013
Phase III Real economy collapse • Lack of confidence • Credit crunch • Bank based financial system in Europe • Germany, too much credit ! • Recession (multiple recession)… • Demand contraction … • Unemployment/poverty/social tensions …. EDHEC May 2013
Shapes of recession (V, U, W, L) EDHEC May 2013
Phase III Real economy collapse • Policy measures • Austerity/internal devaluation … • Monetary injections • Debt cancelation (Greece….) and others measures (Cyprus…) • Safety net regulation (ECB supervision…)… EDHEC May 2013
Phase IV Two scenarios EDHEC May 2013
Phase IV Inflation and social crisis • Inflation (…unavoidable…) • Social unrests…. • Nationalism/Protectionism/Rising role of the state ? • EU/Eurozone break up/How many euros ? • ……………… • Parallels with 1930th (national state) ? • Stalin versus Hitler ? EDHEC May 2013
