2013 10-20 Possibles scenarios of crisis MiF-15' v12


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Current situation on financial market and possible crises scenarios.

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2013 10-20 Possibles scenarios of crisis MiF-15' v12

  1. 1. NES New Economic School The Uncertain Future of the Modern World Berkausov Anton Bondar Svetlana Dunaev Ilya Kondratovich Dmitrii Kurbatov Constantine Mikheev Petr
  2. 2.  Financial crisis — A situation in which the value of financial institutions or assets drops rapidly.       Banking panics Recessions Stock market crashes Burst of financial bubbles Currency crises Sovereign defaults
  3. 3.       Macroeconomic risks remain unchanged, but global activity has become more uneven and is projected to expand only modestly in 2014. Emerging market risks have increased as the result of weaker growth prospects and rising domestic and external vulnerabilities. Market and liquidity risks have increased as markets adjust to prospects of reduced monetary accommodation with implications for asset prices. Risk appetite has contracted, resulting in reversals of capital flows to emerging markets. Monetary and financial conditions remain broadly accommodative, as lending conditions have improved, but emerging market risk premiums have risen. Credit risks are broadly unchanged, reflecting the uneven progress in balance sheet repair and pressures on euro area banks.
  4. 4. Negative • • Internal Factors • • Positive • • • • • • The sovereign debt crisis in Europe Slowing of economies is the cause of high volatility of energy supply/demand (derivatives) The evolving of building bubble in China (overheating of the economy, where growth is not supported by real demand) • The concentration of derivatives in the hands of • the major players (systemic risk) • • External Factors • • • • • Shale sources may be overvalued Crop failure Major war in the Middle East (Israel) The aging of the population Cancellation of offshore opportunities • • Increased quality of risk management (BASEL-III) Investors are dismayed Improving the regulation of markets Increasing investment in Africa The real easing of the monetary policy in Europe Expansion of the WTO — less chance of erecting trade barriers Policymakers are interested in preserving the Eurozone There is a gradual deleverage in the markets Scientists macroeconomists are at the head of Central Banks in the leading countries Slow but real growth in the U.S. (the World major) Technical progress (new sources of demand) Climate warming provides new sources of energy and new features (for example: Northern Sea Route, oil & gas)
  5. 5. Flight to Quality: Fixed Income Bubble Burst Distrust in Europe: Lack of Refinancing
  6. 6. US Government targeted to: Decrease unemployment Stimulate economical growth Decrease inflation US Treasuries dumped over last 6 years October 1, 2007 October 1, 2013 October 1, 2007 October 1, 2013 As a result capital flew into risk www.bloomberg.com Increasing prices of high yield bonds stimulated further growth of the bubble High yield bonds rates decreased Global Debt doubled over past 10 years from $78 trn in 2000 to $158 trn in 2010 Debt grew faster than GDP: Global Debt/GDP=218% in 2000 and 266% in 2010 $48 trn of the growth is due to the governments debt and financial institutions Government debt was the fastest growing category (increased by $25trln) But financial institutions debt was larger class (increased by $23 trn) Unsecuritized lending is still the largest component of all debt and grows futher
  7. 7. National governments injected liquidities in banks which are not willing to invest in real economy and invest it in financial industry further inflating the bubble. SPX VIX index (implied volatility of options on S&P 500) and S&P 500 look very similar to 2007 pattern CBOE S&P 500 3-Month Volatility Index (VXVCLS) is relatively low www.bloomberg.com www.stockcharts.com
  8. 8. USA is close to the targets: Decrease unemployment (target is 6%) Stimulate economical growth Stable above zero inflation (Fed’s target is 2%) QE ending induces flight to quality: http://www.economonitor.com Source: The Wall Street Journal Investors close out speculative positions and move funds in developed countries reducing liquidity and refinance, which will induce currency crises and high yield bonds defaults. www.eia.gov www.financialsense.com These defaults will break a meaningful gap in accounts, which will force selling high liquid assets to cover these gaps. It will ignite the new stage of world financial crisis due to rapid price fall... Sources: Labor Department (consumer prices, wages); Commerce Department (PCE prices); Labor Department via the Federal Reserve Bank of St. Louis (initial claims). The Wall Street Journal
  9. 9. Risk factors:    The heterogeneity of the European economy Source of financing - banks (not the stock markets in the U.S.) Inability to stimulate economic growth in the peripheral countries - due to regulatory and taken "educational measures" (exit from the Euro?)
  10. 10.     Now Investors believe that ECB will coupe with PIIGS If the policymakers of problematic countries do not find solutions (at a minimum, will increase labor productivity) for sustainable economic growth in their countries, it would disappoint investors will stop refinancing these countries If these countries will default it will throw many of big European banks into deep troubles. These banks will be forced to sell good assets to cover loses (ECB cannot cover such big loses without provoking high inflation)
  11. 11. Distrust in Europe New regulations will slow down aggressive credit activity inducing: High yield bonds defaults Liquidity crisis Lack of refinancing Decrease inflation Sovereign default of the South Europe Such default will impose huge losses of capital in big European banks The main flaw — there is no one know what bank or funds will sunk (powered by unsecured CDS) Credit crunch and bank run Deep recession due to tough money market
  12. 12. Anti-crisis measures include: 1. Investments, funding programs, decrease of rates, tax reduction, demand regulatory actions 2. Infusion of new money and support to important banks, corporations, financial institutions which are in trouble. 3. Reforms and acts MEASURES Coordination Operational Coordination between financial institutions and development of cure mechanisms and preventive measures (ЕС and G-20)1 Implementation of anti-crisis measures an follow-up control on all levels (IMF, ECB, etc.)2 *1) http://timesnet.ru/economy/789/ *2) Мировая экономика: глобальный финансовый кризис - Бураковский И.В.
  13. 13.  Short term measures (applied already): 1. 2. Liquidity injection support of domestic demand/reboot of economic processes/to avoid credibility gap Decrease of the basis interest rate Long term — Reforming  US: December 11, 2009 – House cleared bill H.R.4173 – Wall Street Reform and Consumer Protection Act of 2009. 2. On April 15, 2010 – Senate introduced bill S.3217 – Restoring American Financial Stability Act of 2010. 3. On July 21, 2010 – the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted. 1. EU: European Stability Mechanism (ESM) -permanent rescue funding program 2. Basel III regulations for banks 3. European fiscal union 4. Wealth tax 5. Eurobonds 6. European Monetary Fund 1.
  14. 14. MiF 2015