This Time is Different SyndromeSyndrome Financial Crises are things that happen to other people in other countries in other times.Past CrisesTypes We do things better, we are smarter and we’ve learnedWas it from our past mistakes.DifferentWhat’ve We’ll know about a crisis longwe enough before it happens.learned?
The Great Depression 1929 • No World War is coming.Syndrome • We have great political stability.Past Crises • Strong sustainableTypes economic growth by exports.Was it • Debt burden inDifferent developing countries were low.What’ve • Relentless globalwe optimism.learned?
The Great Depression 1929 • Formation of Bubble. • Accumulation of debts • Shrinking money supply by wrong economic policies • Stock market crash • Banking crises
Latin America Debt Crises 80’sSyndrome • Commodity prices are strong. • Low interest rates.Past Crises • Oil money is being recycled.Types • Heavy investments.Was it • Bank loans instead of bondDifferent loans.What’vewelearned?
Latin America Debt Crises 80’sSyndromePast CrisesTypesWas itDifferentWhat’vewelearned?
Asia debt crises 1997Syndrome • Conservative fiscal policyPast Crises • Stable exchange ratesTypes • High rates of growthWas it • High rates of savingsDifferent • No remembered history ofWhat’ve financial crises.we • Rise of Asian Tigers.learned?
Asia debt crises 1997Syndrome • Bubble of “hot”Past Crises money. • Increase in US $Types interest rate. • Cutting peg to US $.Was it • Crises of confidence.Different • Large withdrawal ofWhat’ve cash from Asianwe countries.learned?
Latin America Debt Crises 90’sSyndrome • Bond debts (opposite of 80s). • No desire to repeat 80s crises.Past Crises • More democracies than 80s.Types • Mexico in NAFTAWas itDifferentWhat’vewelearned?
Subprime Mortgage Crisis 2008Syndrome • Powerful economy and worldPast Crises domination.Types • Rise in House prices.Was it • Huge investment in Real Estate.Different • Loans for mortgage.What’ve • Formation of Housing Bubble.welearned?
Greece DebtSyndrome • As part of a strong monetary union, a trustPast Crises was maintained. • Since it joined the Eurozone, it has cededTypes control of monetary policy to the ECB and can no longer print moneyWas it • Greece had not a credible financial reportingDifferent of its fiscal position. • Two of its largest industries, maritimeWhat’ve shipping and tourism were hit strongly fromwe the global economic downturn.learned?
Greece DebtSyndrome • If Greece were to default on its debt payments itPast Crises would amount to the biggest sovereign defaultTypes in history, bigger than that of Russia and Argentina combined.Was itDifferent • If Greece were toWhat’ve default, it would raisewe fears that the crisis willlearned? spread to other Eurozone members.
Types of CrisesSyndromePast Crises Crises EpisodesTypes External Domestic Banking Inflation Currency Default Default Crisis and related CrashWas itDifferent Illiquidity Domestic CurrencyWhat’ve Foreign Insolvencywe Currencylearned?
I. Sovereign External Debt ConsequencesSyndromePast Crises Loss of economy reputation and trust.Types Decrease FDI and investment run.Was it No access to international fund (Greece 1800s).DifferentWhat’ve Followed by Banking crises.welearned? High inflation and low growth.
I. Sovereign External Debt Number of Defaults ofCountry Rescheduling since 1800CANADA 0CHINA 2EGYPT 2GERMANY 8INDIA 3INDONESIA 4MEXICO 8SINGAPORE 0USA 0All countries 250
I. Sovereign External Debt SolutionsSyndrome Cut lender heads (King Philip IV & knight Templars)Past CrisesTypes Force to pay by invasion or union (Britain and Egypt 1881, US and Haiti 1915, Canada and Newfoundland 1936-1949)Was it Short term borrowing (for illiquidity crises)DifferentWhat’ve Improve economic performancewelearned? Rescheduling (Russia with Odious debts)
II. Sovereign Domestic DebtSyndrome Usually in domestic currency.Past Crises Usually long-term (50-80%).Types Comprises 40-70% of all public debts.Was itDifferent Since 1800 AD, only 70 defaults or rescheduling.What’ve Too rare to have domestic default because it’s easily manageable by inflation.welearned? Built up more rapidly after external debts (Argentina in 1982,1989, 2001).
II. Sovereign Domestic Debt SolutionsSyndrome Kings seize lands and cut heads (Philip IV andPast Crises Knight Templars 1307)Types Debasement (with metal coins)Was itDifferent Inflation (most famous solution)What’vewelearned? Economy restructuring
III. Banking Crisis ConsequencesSyndromePast Crises Very sharp decrease in TAX revenues.Types High rise in sovereign debts (Spain 70s).Was itDifferent Costly wave of recession (Japan in 90s until now).What’vewelearned? Cause all other crises.
IV. Inflation Country Max % Inflation since 1800 YearSyndrome or Independence CANADA 23.8 1917Past Crises CHINA 1579.3 1947 EGYPT 40.8 1941Types GERMANY 2.22 * E 10 1923 GREECE 3.02 * E 10 1944Was it HUNGARY 9.63 * E 26 1946Different INDIA 53.8 1943 INDONESIA 939.8 1966What’ve MEXICO 131.8 1987welearned? SINGAPORE 23.5 1973 USA 24 1864
V. Currency Crash- Dollarization $$$- Hysteresis- Loss control of economy planning
Banking CrisisDefault on externalAND/OR domestic Currency crash debt Peak of bank crisis Inflation crisis (if no default)
Was it different? The greatSyndrome depression 1929 Banking Crises. Latin America External and domestic defaults, bankingPast Crises debts 80s crises, inflation crises.Types Asian debt Currency crash, external defaults, banking crisis 1997 crises.Was it Latin America External and domestic defaults, bankingDifferent debts 90s crises, currency crash. SubprimeWhat’ve Mortgage crises Banking crisis.welearned? Greece debt crisis Banking crisis, external default.
What’ve we learned?Syndrome There’s nothing new except what’s forgotten.Past Crises No country have ever escaped economicTypes crises.Was it Crises are not different, only the approachDifferent to solution is what makes the difference.What’ve Economic sustainability is all about balancewe of all economic aspects.learned?