Brian David Butler Professor of international finance and global entrepreneurship with Forum-Nexus Study Abroad. Guest lecturer with the IQS Business School of the Ramon Llull University in Barcelona, and the Catholic University of Milan . Previously, Brian taught finance, economics and global trade courses at Thunderbird’s Global MBA program in Miami, and worked as a research analyst with the Columbia Business School in New York City. Brian currently lives in Recife, Brazil where he is teaching classes at the university Faculdade Boa Viagem . A global citizen, Brian was born in Canada, raised in Switzerland (where he attended international British school), educated through university in the U.S., started his career with a Japanese company, moved to New York to work as an analyst, married a Brazilian, and has traveled extensively in Latin America, Asia, Europe and North America. [email_address] LinkedIn/briandbutler Skype: briandbutler
Brian Butler is a specialist in international economic analysis, and is founder of the prestigious “GloboTrends“ ( www.globotrends.com ) online economics site, which has been featured as syndicated content on Nouriel Roubini’s RGE Monitor, Emerginvest.com, Business Week Exchange, Wikinvest.com, and other leading news outlets. http:// globotrends.pbworks.com / , http:// blog.globotrends.com /
A steady accumulation of current-account deficits has left Greece, Portugal and Spain with net foreign debts of 80-100% of their GDP. These frailties are a threat to the stability of the euro area as a whole.
Economist.com, A special report on the euro area, One size fits none, Jun 11th 2009
Italy + debt – Similarity to Greece http://thegovmonitor.com/world_news/united_states/greece-italy-and-europes-sovereign-debt-crisis-28846.html
“ even if public revenues are able to cover all expenditures, interest costs will still lead Italy’s debt to grow faster than its sluggish economy—which consensus expects to grow at an average annual rate of 3 percent in nominal terms over the next seven years.
‘ The July bond redemption of 16.2 billion euros is the last until April 2011,
leaving 32 billion euros of maturing treasury bills spread out over the rest of the year.
Credit Crunch = Result Assumes that short term markets will continue being LIQUID (will keep spinning, full of flowing cash) But, what happens if short term markets freeze up? This is what happened after Lehman Bros. failed (and almost happened again with Greece)…
Borrow LOW – Lend HIGH * rates Borrow LEND 1% 5% “ Carry Trade” - Make money on ‘spread’ Works well unless…
Borrow LOW – Lend HIGH * rates Borrow LEND 1% 5% LOSS!! What if borrow is also = short term , and what if the rates suddenly go UP?!?! 10%
But, how do you measure the health of the short-term credit markets? What indicators should you watch? Libor, OIS-spread, Credit Default Swaps
SPREAD Source: NY Times “Euro burdons some nations”, Jan 2009
The extra interest investors demand to hold Spanish debt rather than equivalent German bonds narrowed to 206 basis points . That spread surged to 221 yesterday, the highest since before the start of the euro, on speculation in the press that Spain would need to tap a European Union financial lifeline. The gap compared with 160 basis points at the end of May .
“ US…runs no danger of adverse currency mis-matches. …In the US, “currency mismatches work in exactly the opposite direction; the country has assets denominated in foreign currency and liabilities denominated in domestic currency… The more unwilling the rest of the world is to hold the dollar, the more solvent the US becomes”
Martin Wolf book, “Fixing Global Finance”
The US Balance Sheet: (just looking at external financing)
Earning foreign currency
Foreign gov’t buy US Treasuries is US dollars!
So, what happens if US dollar “depreciates”? (does US become more, or less “Solvent”?)
(and invest abroad at higher returns, and run NO risk of insolvency!)
Why US needs this privilege (low rates, in own currency)
Massive Current account deficit
Social Security / Health care reforms
Demographics & the Debt By 2050; a third of the rich world’s population will be over 60 “ The demographic bill is likely to be (10x) ten times bigger than the fiscal cost of the financial crisis.” The Economist, June 2009
International IQ moment What is happening in Greece? - discussion
Athens Greece Athens Greece – at the heart of a European Crisis?
- either (hand written, neatly!) or computer, email:
Text Book: “An Introduction to Global Financial Markets” (Valdez), chapter 11, “European Economic and Monetary Union” 2007, (suggested focus: p. 287-305). Pay special attention to “EMU – the benefits” – p 287, and “The counter arguments” – p289
Handout article: “Holding Together, A special report on the euro area”, from the Economist, June 13 th 2009 (p 1-16)
* Grad Students only:
Read handout: “Country Forecast, Economies in Transition, Eastern Europe”, from EIU, May 2009 (p. 5-10)
Group Project, “The Euro Zone – before, during and after the Global Economic Crisis”