A Comparative Analysis of the Japanese Crash, South-East Asian crisis, U.S.

Crisis and Euro zone Crisis

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Road map

Sr. No. Roll no. Name

1 2 3 4 5 1 31 21 11 41 Kashish Ahuja Farrokh Pardiwalla

Topic
South-East Asian Crisis Japan Crisis

Pramod Khandelwal U.S. Sub-Prime Crisis Sachin Euro zone Sovereign Debt Ghadigaonkar Crisis Navnath Shelar

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South-East Asian Crisis

Introduction:
o South-East Asian financial crisis, a period of financial contagion, beginning in July 97. o Until 1997, Asia attracted almost half of the total capital inflows into developing countries.

o Maintained high interest rates.

o Large inflow of money and experienced a dramatic run-up in asset prices.

o Drastically affected countries: Thailand, Indonesia, South Korea

o Fairly Hurt: Hong Kong, Malaysia, Laos and Philippines. o Least affected countries: People's Republic of China, Taiwan, Singapore, Brunei and Vietnam. By Group 1

South-East Asian Crisis

Main causes of SEA Crisis: o Burden of foreign debt.

o Excess debt led to major failures and takeovers in case of South Korea.
o Foreign debt-to-GDP ratios rose from 100% to 180% in the four large Association of Southeast Asian Nations (ASEAN) economies during the crisis. o Excessive real estate speculation.

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South-East Asian Crisis

Thailands Economic Situation:
o Mid-May 97, Thailand baht collapsed.

o Spark: June 97, Thai government was forced to float the baht, booming economy came to a halt.
o Massive layoffs in finance, real estate, and construction, unemployment at all-time high. o Workers returning to their village and 600,000 foreign workers being sent back to their home countries. o Baht reached 56 units to the US $ in Jan 98, GDP contracted by 1.9%. o Thai stock market dropped 75%.
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South-East Asian Crisis

Indonesias Economic Situation:
o Drastic devaluation of the rupiah from 2000 to 18000 for 1 US$.

o Indonesia lost 13.5% of its GDP.

o Governor, Bank Indonesia sacked.

o President Suharto resigned after 30 years in power.

o Jakarta Stock exchange touched a historic low.

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South-East Asian Crisis

South Koreas Economic Situation:
o Drastic devaluation of won from 800 to 1700 to 1 US$.

o Banking sector burdened with NPAs, excess debt.

o Moodys downgraded rating to B2 (A1).

o National debt-to-GDP ratio more than doubled.

o Major setback in automobile industry

o Seoul stock exchange dropped 18%.

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South-East Asian Crisis

Philippines Economic Situation:
o Growth dropped to virtually zero in 1998.

o Peso fell significantly from 25 to 55 to 1 US$.

o Philippine GDP contracted by 0.6%.

o President Joseph Estrada forced to resign.

o Philippine Stock Exchange fell to 1000 points from a high of 3000 points in 1997.

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South-East Asian Crisis

Malaysias Economic Situation:
o Malaysians ringgit lost 50% of its value, falling from above 2.50 to under 4.57 to 1 US$. o GDP plunged to 6.2%. o Kuala Lumpur Stock Exchange lost more than 50% from above 1,200 to under 600.

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South-East Asian Crisis

Steps taken to overcome crisis:
o Due to trade surplus, Indonesias rupiah strengthened to the US$.

o Indonesia's monetary authorities widened the rupiah currency trading band from 8% to 12%.
o Managed floating exchange regime replaced by a free-floating exchange rate arrangement o Monetary authority of Singapore allowed gradual deprecation of 20% of Singapore dollar o Malaysian imposed strict capital controls and introduced a 3.80 peg against the US$ o The principal measure taken was to move the ringgit from a free float to a fixed exchange rate regime. By Group 1

South-East Asian Crisis

Role of International Monetary Fund (IMF):
o Provided $40 billion bailout packages to stabilize currencies of South Korea, Thailand, and Indonesia economies subject to: o Restructuring and Reorganizing, o Establishing strong regulatory frameworks. o Limit currency depreciation. o Limit inflation. o Rebuild Foreign Exchange Reserves.

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Japan Crisis
Introduction:
In late 1980s, Japan implemented stringent tariffs and policies to encourage people to save their incomes resulting in loans and credits becoming easier to obtain. Further, large trade surpluses helped Yen appreciate against the foreign currencies widening the trade surplus. Excess liquidity in the financial system implemented by Bank of Japan caused overconfidence and euphoria about the economic prospects resulting into aggressive speculation particularly in Tokyo Stock Exchange and the Japan real estate market.

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Japan Crisis Here is how it happened

Savings/funds deposited into Banks

Banks increased lending's

Land & Stock prices skyrocketed

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Japan Crisis
What Bubbled Japanese economy:
o Financial Liberalization, accelerating pace in deregulation and deepening of Capital Markets created excess liquidity by banks causing a land and stock market bubble. o People with spare cash bought land and shares causing them to rise. The Japanese monetary authorities were worried about inflation but they were then slow to reduce them. o Bank of Japan increased interest rates to control Inflation which aggravated the crises. Higher interest rates and slumping asset values caused an increase in loan defaults resulting in fall in assets value and share prices, which lasted 10 for years. o Due to weak corporate governance and regularity forbearance, loan defaults were compounded because Japanese banks had made a series of bad lending decisions thereby creating ZOMBIES. By Group 1

Japan Crisis
o The Japanese economic miracle was based on a strong degree of government intervention. In some respects this worked very well. But, the downside is that the government and banks tried to protect declining, inefficient industries / firms. o Technically Japan understands what must be done, but was UNWILLING to make painful Short term adjustments necessary to re-establish long run growth. o Bad monetary policies have been timid and ineffective and they were now exhausted with ZERO interest rates leading to LIQUIDITY TRAP. o Inflation expectations fell to negative. Japan had caught Capitalism worst disease - Deflation which made normal demand side policies ineffective.

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Japan Crisis
What were the impact:
o Bubble and Burst in Land and Stock Markets: o Land value-to-GDP ratio increased from 3.3 in 1985 to 5.6 in 1990, followed by a 15 year-long decline, reaching the bottom of 2.4 in 2005. o Stock market bubble burst one year prior to land market bubble, and reached its bottom in 3 years. o What caused the bubble? o Bubble is likely to occur when the interest rate is lower than the GDP growth rate. o Call rate was lower than nominal GDP growth rate from 1987 to 1990.

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Japan Crisis
o Land price hike in the late 1980s: o Tax rates on land holdings and transactions were reduced in 1982. Redevelopment of government-owned land was promoted from 1983.

o Land for offices in Tokyo, especially for financial services, was perceived to be in excess demand from 1985, when Ministry of Land released the forecasts of the demand for offices in Tokyo. o All these factors, along with easy monetary policy, promoted speculative transactions for land.
o Balance sheet adjustment by firms: o Non-manufacturing firms raised debt-to-asset ratio in the bubble period and it took a decade to return the leverage ratio to the prebubble period. o The debt-to-asset ratio of manufacturing firms increased after the collapse of the bubble, as the value of assets declined. By Group 1

Japan Crisis

Land surrounding of the Imperial Palace in Tokyo estimated to be worth more than whole of California
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Japan Crisis
o Measures taken Japanese authority:
o Monetary Easing: o Bank of Japan lowered the official discount rate on July 1, 1991, and continued to lower it or the call rate (i.e., overnight interbank rate) until the call rate became zero in February 1999. o Despite the monetary easing, the land price continued to fall and the consumer price index also fell in 1995, 1999 and afterwards. o One reason for the weak effects of monetary easing on asset and goods prices is the banks balance sheets deteriorated by nonperforming loans.

o Rapid changes in monetary policy destabilizes the economy. o The rapid changes in call rates by Bank of Japan in the late 1980s and the early 1990s resulted in the volatile land prices and stagnant real economy. o Monetary policy should be conducted in a forecast able way and changed gradually to stabilize the economy. By Group 1

Japan Crisis
o Fiscal Stimulus: o The government released a series of economic policy packages from March 1992 to September 1995, increasing expenditures on public works by issuing government bonds. o The effect of fiscal stimulus on GDP was limited, partly due to the leakage to imports.

o Increases in public works as well as increases in social security benefits and decreases in tax revenues, resulted in the accumulation of government debt throughout the 1990s.

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U.S. Sub-Prime Crisis

Introduction:
The upheaval in the global financial markets has caused more mayhem in a fortnight than the world has seen in its entire economic history.

A Sub-prime loan: Sub-prime mortgage loans (or housing loans or junk loans) are very risky. But since profits are high where the risk is high, a lot of lenders get into this business to try and make a quick buck. Sub-prime loans are dicey as they are given to individuals who are not financially sound enough to be given a loan due to unstable incomes or low creditworthiness.

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U.S. Sub-Prime Crisis

How destruction happened?
In the early 2000s, interest rates in the U.S. were low because there was abundant money supply. When interest rates are low in general it causes the economy to expand/ grow as businesses and individuals can borrow money easily which causes them to spend more freely and thus increases the growth of the economy. Institutions started offering loans to buyers with FICO scores of below 620. Because these borrowers were considered less likely to be able to pay back the loan, these sub prime borrowers were charged higher interest rate. Sub-prime home loans were given out as floating rate. A floating rate home loan as the name suggests is not fixed.
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U.S. Sub-Prime Crisis

Institutions giving loans started hedging these securities, securing themselves from the risk if incase the borrowers default also allowing refinance their loans.

To solve these problems, Investment Banks came up with concept called Securitization. The pools of these loans were termed as Subprime Mortgage Loans, Mortgage-backed securities (MBS), Adjustable-rate mortgages (ARM).
Under securitization, banks sold these pools of loans to other big Financial Institutions, thus getting more liquidity and also transfer the risk associated with these loans. As per regulatory norms, a large portion of the financial institutions that are potential purchasers of these mortgage pools are not allowed to buy or are restricted from buying sub prime debt because it is considered too risky.
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U.S. Sub-Prime Crisis

To get around this, what investment bankers did was took a pool which contained subprime mortgages and divided it up into different levels known as tranches. Each tranche thus had a mix of good and bad loans.

Credit Rating agencies like S&P, Fitch, Moodys gave them different ratings for each level, but the ratings were much better than they deserved.
This allowed investment bankers to sell off a large portion of the sub prime loans as debt instruments with above prime credit ratings thus expanding the number of potential buyers of that debt. Many big fund investors like hedge funds and mutual funds globally saw sub-prime loan portfolios as attractive investment opportunities. The percentage of these subprime mortgages rose from the historical 8% to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S.
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U.S. Sub-Prime Crisis

Further in the years leading up to the crisis, significant amounts of foreign money flowed into the U.S. from fast-growing economies in Asia and oilproducing countries.

Until 2006, U.S. economy was growing fast enough, the housing market was also flourishing till the Federal Reserve (FED) decided to increase interest rates, which it continued to do until fed funds rate stood at 5.25% in January of 2007 (up from 1%).

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U.S. Sub-Prime Crisis

Several things happened as a result of this: o Since many of the sub prime borrowers took out floating loans or teaser loans, with US interest rising, the EMIs too increased. Higher EMIs hit the sub-prime borrowers hard. A lot of them in the first place had unstable incomes and poor credit rating, they defaulted!!! o With interest rates began to rise, housing prices started falling in 2006 2007. Falling prices resulted 23% of U.S. homes worth less than the mortgage loans amounts and almost 50% from their peak in 2006 in some cases. CRISIS BUBBLE began to BURST of the United States housing. The economy began to slow down.

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U.S. Sub-Prime Crisis

o These MBS for the most part were no longer with the smaller lenders as they had been sold off and traded among different financial institutions from around the World.

o Since these huge pools of pools rely on short term borrowing to buy the longer term debt and have to periodically roll the loans they are issuing over. o Now, they could no longer borrow short term to cover their obligations and were therefore in danger of having to sell off huge chunks of these mortgages backed securities to avoid running into financial difficulty.
o As a result these ongoing defaults and falling prices, these global financial institutions who had borrowed and invested heavily in these securities reported significant losses wiping out their net worth. Total losses were estimated in the trillions of U.S. dollars globally.
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U.S. Sub-Prime Crisis

There are two other major ways in which the effect was felt across the globe: o First, U.S. is biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in U.S. securities. Thus any crisis in the U.S. has a direct bearing on other countries, particularly those with large reserves like Japan, China and - to a lesser extent - India. o Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world.

Pillars of Wall Street crumbled leading the pave for Global Financial Crisis
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U.S. Sub-Prime Crisis

Impact on U.S. and Global Economies:
o Global banks and brokerages have had to write off an estimated $512 billion in sub-prime losses so far, with the largest hits taken by Citigroup ($39.1 bn) and Merrill Lynch ($29.1 bn). o A little more than half of these losses, or $260 bn, have been suffered by US-based firms, $227 billion by European firms and a relatively modest $24 bn by Asian ones. o Unemployment increased from 5.7% in 2007 to 10% in 2010 to 15.3 mn.

Sub-prime crisis led to the collapse of: o Bear Sterns, one of the world's largest investment banks and securities trading firm in U.S. Bear Sterns was bought out by JP Morgan Chase.
o Merrill Lynch and Countrywide Financial was bought out by Bank of America.

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U.S. Sub-Prime Crisis

Impact on U.S. and Global Economies:
o Freddie Mac and Fannie Mae, world largest brokerage houses which had roughly $12 trillion outstanding in home loan mortgages in U.S. were nationalized. o Lehman Brothers - fourth largest investment bank in U.S. filed for Chapter 11 - Bankruptcy.

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U.S. Sub-Prime Crisis

Sub-prime losses suffered by few bank across the Globe:
Company Citigroup UBS Merrill Lynch HSBC Royal Bank of Scotland Morgan Stanley Wachovia American International Group Credit Suisse Bank of America Deutsche Bank Mizuho Financial Group JPMorgan Chase Freddie Mac Countrywide Financial Lehman Brothers Barclays Socit Gnrale Wells Fargo Bear Stearns Washington Mutual Goldman Sachs Fannie Mae BNP Paribas ICICI Bank Business Type Bank Bank Investment Bank Bank Bank Investment Bank Bank Insurance Bank Bank Bank Bank Bank Mortgage GSE Mortgage Bank Investment Bank Bank Bank Bank Investment Bank Savings and Loan Investment Bank Mortgage GSE Bank Bank Country U.S. Switzerland U.S. United Kingdom United Kingdom U.S. U.S. U.S. Switzerland U.S. Germany Japan U.S. U.S. U.S. U.S. United Kingdom France U.S. U.S. U.S. U.S. U.S. France India Loss (in USD Billion) $39.10 $37.70 $29.10 $20.40 $15.20 $11.50 $11.10 $11.10 $9.00 $7.95 $7.70 $5.50 $5.50 $4.30 $4.00 $3.93 $3.10 $3.00 $2.90 $2.60 $2.40 $1.50 $0.90 $0.87 $0.26

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U.S. Sub-Prime Crisis

Few important measures taken by U.S. authorities:
Various government rescue programs were implemented to stabilize the financial system during late 2007 and early 2008. o USD 700 billion Troubled Assets Relief Program (TARP) was announced by U.S. govt. to purchase assets and equity from financial institutions. o Interest rates were lowered to 2% from 5.25% through separate sections between Sep. 2007 to Apr. 2008. o Announced credit easing measure by creating liquidity and purchasing the mortgage-backed securities from the various institutions.

o U.S. Treasury dept. invested about hundreds of billion dollars in various banks & institutions through its Capital Purchase Program in an effort to prop up capital and support new lending: o American Insurance Group (AIG) was bailed out by giving $182 bn bridge loan to tide over the crisis. o Citigroup received $45 bn support in 2 installments from U.S. govt.By Group 1

Euro Sovereign Debt Crisis

Euro zone A Brief:
It is an economic and monetary union (EMU) of 17 European Union (EU) member states . They have adopted the Euro as their Sole Trading Currency. Euro became a reality on Jan 1, 1998 , but came for the European consumers on Jan 1 2002. It currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

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Euro Sovereign Debt Crisis

Euro zone Crisis - what happened?? This is the biggest challenge Europe is currently facing since 1990. Due to Global Financial Crisis that began in 2007-08, the euro zone entered its first official recession in third quarter of 2008. Its immediate causes lie with the US crisis of 2007-09 which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. The result in Euro Zone was Sovereign debt crisis. European debt crisis is the shorthand term for Europes struggle to pay the debts it has built up in recent decades. Five of the regions countries PIIGS - Portugal, Italy, Ireland, Greece and Spain failed to generate Enough Economic Growth to make their ability to pay back Bondholders the guarantee it was intended to be.
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Euro Sovereign Debt Crisis

Euro zone Crisis - why it happened?? o Easy credit conditions during the 20022008 period that encouraged highrisk lending and borrowing practices. o International trade imbalances, Real-estate bubbles that have since burst the 20082012 global recession

o Structural Problem - Euro zone, having 17 nations as its members, required unanimous agreement for a decision making process which lead to failure in complete prevention of contagion of other areas.
o Fiscal indiscipline policies related to government revenues and expenses.

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Euro Sovereign Debt Crisis

Mayhem it has caused: o Rising unemployment, lower tax returns, higher budget deficits etc. Spain is experiencing the highest unemployment rate of 20%. o Rising household and government indebtness. o Interest rates surged on government bonds. o These European peripheral countries (PIIGS) borrowed enormous amount of debt in Euros and hence have huge sovereign debt obligations.

o Large current account deficit: weakening export competitiveness.

o Voices are being raised by the Euro counterparts to remove Greece from Euro zone.
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Euro Sovereign Debt Crisis

o Deficit percentage and the Debt to GDP ratio for Greece are highest among all the European States. o Adversaries like housing bubble in Spain and speculation by traders in Portugal leads to similar situations in these countries as well. These European peripheral countries (PIIGS) borrowed enormous amount of debt in Euros and hence have huge sovereign debt obligations.

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Euro Sovereign Debt Crisis

Few measures announced : o Endure austerity drives which includes grind down salaries, wages and bonus, government spending etc. o Raise Productivity o Increase Export & Reduce Import o Slash Spending o Raise taxes o Transparent Banking system

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Euro Sovereign Debt Crisis

Greek Debt Crisis: In the first quarter of 2010, the national debt of Greece was put at 300 billion ($413.6 billion), which is bigger than the country's economy. It has the worst combination of high debt level, large budget deficit and large external debt. Investors responded by demanding higher yields on Greeces bonds, which raised the cost of the countrys debt burden and necessitated a series of bailouts by the European Union and European Central Bank (ECB). Largest industries, tourism and shipping, were badly affected combined with long following trade deficits and large tax evading population lead the Greece budget deficit and public debt to rise to insurmountable amount. Greece Athens Olympic Cost was several times more than the estimated cost. By Group 1

Euro Sovereign Debt Crisis

Snap-shot of Greece Economy (as of 2011):

GDP - $304 billion Debt-GDP ratio 165.3% of GDP Public Debt 303.527 billion (132.4% of GDP; June 2012,) Budget Deficit 19.565 billion (9.1% of GDP) Revenues 88.075 billion (40.9% of GDP) Expenses 107.769 billion (50.1% of GDP) Unemployment 23.1% (1.147 million; May 2012)
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Euro Sovereign Debt Crisis

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Euro Sovereign Debt Crisis

Measures: As per the European Central Bank President Mario Draghi reiterates his promise to do "whatever it takes to save the euro.

o The ECB will draw up a mechanism in the coming weeks to make outright purchases to stabilize stressed euro zone borrowing costs.
o European governments and the International Monetary Fund (IMF) have stunned global stock markets with 489 ($639 billion) in credit available to the regions troubled banks at ultra-low rates. o Second bail-out amounting to 130 billion ($173 billion) agreed in 2012. o European Financial Stability Facility (EFSF).

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Euro Sovereign Debt Crisis

Measures: o Long Term Refinancing Operation (LTRO)

o Adopted a number of austerity packages: o Freeze in the salaries of all government employees, a 10% cut in bonuses, o On the fears of bankruptcy, the Greek parliament passed the "Economy Protection Bill", which was expected to save another 4.8 billion The measures include (in addition to the above): 30% cuts in Christmas, Easter.
o 150,000 jobs cut from state sector by 2015, of which 15,000 shall be cut by the end of 2012. o Pension cuts worth 300 million in 2012.
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Euro Sovereign Debt Crisis

CONCLUSION: Big Brothers should help the countries in problem to come out from the crisis. Either the euro zone should go for integrating their economic policies. OR It collapses, and the Greeks and other profligate countries devalue and the banks (German, French, British and American) lose hundreds of billions.

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A comparative analysis
o Money supply o High Profit, High Risk o Massive credit expansion, avail of cheap credit o Increased speculative activities o Opening of the economy o Real Estate price boom o Over lending, credit o Over leveraged Household sector / Corporations
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Thank you

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