21-09-2012, 05:10 PM
The Eurozone Financial Crisis
The Eurozone.ppt (Size: 753 KB / Downloads: 34)
Transmission from the United States
Housing Price Bubble and Collapse
Financial Market Freeze and Collapse
Policy Response
Support for Financial Sector
Monetary Policy
Fiscal Policy
Effect of the Euro Currency Zone
Greece’s Problems
Transmission from United States
US Housing Bubble created by
Low interest rates
Lax regulation of sub-prime mortgages with adjustable rates, two year teaser rates
Securitization of mortgages, sold to unwary buyers as highly rated
US Bubble popped when
Interest rates rose in 2006, housing prices fell
Subprime mortgages and securities defaulted
European Crisis Began Later
US Housing Prices peaked in late 2006
European Housing Prices peaked a year later
Financial Crisis struck Europe & US at same time, August 2007, after Bear, Stearns, Fannie Mae & Freddie Mac taken over with US Government assistance in April and July of 2007
International credit markets froze up in August 2007 when subprime based hedge funds collapsed in Europe and US. No longer able to borrow short-term funds, banks faced much higher risk premia
Why did the Crisis Spread?
Subprime Debt Obligations made in USA held around the world caused global financial shock.
Housing bubbles burst in UK , Ireland, Spain as well as US.
Failure of Lehman Bros in September 2007 caused massive panic over counterparty risk. AIG required $180 billion bailout to cover Credit Default Swaps, insurance against bond defaults underwritten without reserves.
Stress on banks around the world led to shrinking credit availability. “Shadow” off-balance-sheet banking sector collapsed as short-term funding vanished.
Falling demand spread from US to all countries; as US imports dropped, other countries’ exports fell.
European Financial Institutions under Stress
BNP-Paribas forced to close funds in August 2007
UK bank Northern Rock taken over by government
German state banks IKB, WestLB, BayernLB and SachsenLB bailed out by government
Irish banks given government deposit guarantees
Switzerland injects funds into UBS
Iceland’s banks unable to roll over short term borrowing, default on deposits of foreigners