Global Finance Crisis and Monetary Policy

8/3/2019 Global Finance Crisis and Monetary Policy

1/46

Dr. Nguyen Thanh HaiFrankfurt and Hanoi April 2011


2/46

1. Causes of Global Finance Crisis

2. Policy Reaction (hier mainly MonetaryPolicy)

3. Recommendations for Vietnam


3/46

1 . The massive interest rate cuts by central banks + cheap supply of

money by the banks since 2000 2. Speculative investment in assets (especially real estate, stocksand risky securities with high returns but also raw materials), thusrapidly increasing prices

3. Concealment of the risks through CDS and MBS

4. failure of risk management and finance supervision 5. Fighting the inflation and central banks raise interest rates

6 . bursting of the housing bubble and falling Prices

7 . Systematic failure of financial institutions + the bankruptcy of

Lehman Brothers as a system break

8. spread of the financial crisis of U.S. to the rest of the world (asthey have similar pattern with different intensity and volatility) 9 . The global financial crisis + world economic recession


4/46


5/46

Monetary policy operations and ECB rates

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

2000 2001 2002 2003 2004 2005 2006 2007 2008

%

Tender rate / Main refinancing rate Marginal lending fac il ity Deposit fac il ity EONIA


6/46


7/46


8/46


9/46

0

50

100

150

200

1880 1900 1920 1940 1960 1980 2000 2020

Year

In

dex

0

100

200

300

400

500

600

700

800

900

1000

Population

inMillions

Home Prices

Building CostsPopulation


10/46


11/46


12/46


13/46

2. Policy Reaction (hier mainly MonetaryPolicy)1 Global financial crisis + Weltwirtchaftrezession 2 Reactions of the central banks and governments 3 Rescus parkete and economic stimulus programs

4 massive cuts in interest rates to near 0% and liquidity andquantitative easing by central banks 5 increased indebtedness of the states 6 Inf lation is rising again and debt crisis 7 Exist Strategy8 Central Banks raise interest rates again and tight monetary

policy and goverments set budget saving programs 9 The circle has closed and a new round begins.


14/46

-The bailout programs in the U.S. is 700 billion U.S. $, etc. also increasing the deposit guarantee to

250 000 U.S. $ and a tax cut of $ 100 billion (Ermerging Economic Stabilization Act October 2008).-After that, the U.S. government further Banks Capital Purchase Program in value of U.S. $ 250billion, including $ 100 billion for the four largest banks.

-In Euro-Zone includes the bailout program also 1 000 billion , of which Germany alone has a rescueplan of 500 billion euros and France set up with 320 billion .

- The IMF has also provided a funding plan for the global financial crisis in value of 1 000 billionsUS Dollar.- The Federal Reserve has with the global financial crisis 1 300 billions US Dollar Asset Purchaseimplemented programs, inter alia also toxic paper is bought to supply the market with fresh money tosave the illiquid banks.

- Fed has a credit plan for direct lending for large corporations in value of U.S. $ 900 billion.

- Overall, bailout programs of the U.S. cost almost 3 000 billions U.S. Dollar

- here I do not go into further details, see Austin Murphy in which he estimates the loss by the globalfinancial crisis level of 10 000 billions. U.S. Dollar.

-In October 2010, the Fed decided to buy Treasuries directly ($ 600 billion in value, monthly U.S. $ 75

billion). When looking at the reinvestment of previous asset-purchase program, then increase thispurchase program by June 2011 even U.S. $ 900 billion (110 billion U.S. $ per month).

- hier briefly the stabilization fund and stabilization mechanism in Germany and Europe:-flydescribed theexampleof thestabilization fund byGermanyfor thefinancial market(SoFFin),on 18October was gegndet2008(with thefollowing tasks:acquisition,Garran tie,recapitalization and assumption oftheriskp osition offinancial institutions)and theEFSFfrom Europeand used for this purposethesupport oftheIMF, and thepermanents tabilization mechanism in mid-2013 (Hereis therescue of750 billion Eurofor thehighlyindebted countries did notmention theeuro,see SchoEbert,Fede ral Bank):

-Here,briefly described theexampleofthe stabilization fund byGermany for thefinancial market(SoFFin),on 18October was gegndet2008(with thefollowing tasks:acquisition,Garrantie,recapitalization and assumption ofther iskposition offinancial institutions)and theEFSFfrom Europeand used for this purposethesupport oftheI MF,and thepermanent stabilization mechanism in mid-2013 (Hereis therescue of750 billion Eurofor thehighly indebted countries did notmention theeuro,see SchoEbert,Fed eral Bank):Here,briefly described theexampleofthe stabilization fund byGermany for thefinancial market(SoFFin),on 18October was gegndet2008(with thefollowing tasks:acquisition,Garrantie,recapitalization and assumptionofthe riskposition offinancial institutions)and theEFSFfrom Europeand used for this purposethesupport ofthe IMF,and thepermanen tstabilization mechanism in mid-2013 (Hereis therescue of750 billion Eurofor thehighlyindebted countries did notmention theeuro, seeScho Ebert,Federal Bank):


15/46


16/46


17/46


18/46


19/46


20/46


21/46


22/46


23/46


24/46


25/46


26/46


27/46


28/46


29/46

A number of countries have now set up at the world economicrecession in 2009, large fiscal stimulus packages:

- USA: economic stimulus package in February 2009 $ with a volume of789 billion, equal to 6.5% GDP, including 30% for the tax cut , for theconstruction of infrastructure and creation of 3 million jobs.

- Germany: Economic Stimulus Package I in January 2009 was 50billion, equal to 1.6% of GDP, of which 17.3 billion for infrastructure.- China has a $ 468 billion US Dollar economic stimulus package,about 10% of GDP- Vietnam has two economic stimulus packages planned $ 8 billionequal to 8.5% of GDP, the actual expenditure is less than planned, of

which U.S. $ 1 billion for the interest subsidy of 4%.


30/46

The stimulus packages have increasedstate budget deficit and rising public debt

(as of end 2010 USA: 98% of GDP, Japan:201% of GDP, Germany: 83% of the GDPfor Europe, see the table below as of theend of 2009 and Vietnam 56% of the GDP

in late 2009 and estimated at 61% of GDPend-2010)


31/46


32/46


33/46


34/46


35/46


36/46


37/46

Until now, all central banks have begun their Exist strategyand implemented, as inflation in all countries back.-Be the first central bank, the Reserve Bank of Australiaincreased its benchmark interest rate at the end of 2009 anduntil now have another 4 times to 4,75%.

-As a further major central bank also Poeble Bank of Chinasince early 2010 has 4 times the prime rate and 5 times toincrease the reserve requirement ratio to fight the highinflation, 5,4% in March 2011.-ECB in April 2011 as the first Plays its key interest rate

increased by 0.25% to 1,25%, further interest rate moves willfollow this year, CPI in Euro-Zone is 2,8% in April 2011.-Fed has just announced to stop the bond purchase programon schedule in June 2011. Fed interest rate adjustment is onlya matter of time, because the CPI in March 2011 rise in U.S.already at 2.7%.


38/46


39/46

1. Exist strategy of most central banks in the world

means rising interest rates and rising funding costs,the already rising on the prices of raw materials .

2. Vietnam as a small open, macroeconomic veryunstable . The external factors will be very bad(increasing import prices, rising external financingcosts ...).

3. In response, Vietnam has 2 options: a. themacroeconomic equilibrium and stability must berestored. 2. to restructure the economic and toreduce the dependence on external factors.


40/46

- Vietnam has in the past 10 years 2001-2010 a strategythat attaches to the growth as its high priority andwithout attention on the macro economic equilibriumand stability.

- The new economic strategy 2011-2020 of Vietnamwanted to correct that mistake and focus on stabilityand substainability.


41/46

- Before the global financial crisis, Vietnam has in 2007,a capital inflow rate of almost 25% of GDP. This factorwas combined with an expansionary monetary and fiscalpolicies, causing the inflation up to 28% (March 2008),

because from my Calculation, the SBV can sterilizedonly about 60% of the 10 billion U.S. $ - purchases (ofwhich about $ 6 billion hot money).

-A capital control, or at least no further capital

liberalization Vietnam had made some protection forVietnam Economy.

-The IMF is fundamentally opposed to capital controls,but has recently recommended that step yet.


42/46

-In the global financial crisis, Vietnam didnt needbailout programmes for financial institutions, but morethan 10 small banks needed the SBV refinancing toprotect them on bankcrupcy. SBV set realy a system andinstitutional protection.

-After the global financial crisis should cease thisinstitution protection. All difficulties of monetary policyin the last 3 years arise because of this institutionprotection. M & A among banks and financial

institutions should not be a taboo, but a normalbusiness in Vietnam. This facilitates the bankingsupervision and risk management.


43/46

-The first short-term successes of De-Dollarization inthe second quarter of 2011 must be supported by futhermedium-and long-term measures (including reducingdollar loans, import surplus, particularly with China, the

government budget deficit and public investment,including the SOEs .... ).

-The De-Dolarization is so far successful that the SBVcan now increase foreign exchange reserves, but must be

accompanied with fully consistent Sterilization throughthe Open market Operation OMO to keep the fightinginflation.


44/46

-In the global financial crisis, the SBV has no quantitativeeasing, as the interbank money market has been continuedoperating in Vietnam.-Vietnam begun implemented very early the Exist Strategy

(on 25 Nov 2009, the base rate increased from 7 to 8%) whilethe inflation was already increasing at that time. But theseExist Strategy was unfortunately not consistent implementedin 2010,- So must be introduced in early 2011 dramatically restrictive

monetary policy (loan interest rates rise back up to 20-25%,which means that business will be scollaped, GDP may beincreasing in 2011 only 6.5% - Goverment goal is 7 to 7,5%.)


45/46

The Conclusion for Vietnam must be:1. Vietnam has to reach the long-term strategy of stability-oriented economic and

monetary policy.2. This mean for monetary policy,: a stable money supply (not pumped by political

will) and an action program to create confidence in the VND (including aconsistent midd-term De-Dolarization, a in the public predictable monetarypolicy, a relatively independent position of the central bank .. .).

3. I believe that Vietnam does not need a stabilization fund for the financialmarket, but a Stabilization Mechanism, which will be etablish in to marketinstitutions (a healthy, market-based financing of budget deficit with a liquidbond market, an adequate deposit insurance as well as an effective and risk basedfinancial supervision, a functioning risk management)

4. by the macro economic stability must be included a lower budget deficit,balanced trade and current accounts, low inf lation below 5%, a stable exchangerate, ...).


46/46

Thank you

Global Finance Crisis and Monetary Policy

Documents

Transcript of Global Finance Crisis and Monetary Policy