Current situation on financial market and possible crises scenarios.

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. 
Financial crisis —
A situation in which the
value of financial institutions
or assets drops rapidly.
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Banking panics
Recessions
Stock market crashes
Burst of financial bubbles
Currency crises
Sovereign defaults

4. 
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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.

5. Negative
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Internal
Factors
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Positive
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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)
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The concentration of derivatives in the hands of •
the major players (systemic risk)
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External
Factors
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Shale sources may be overvalued
Crop failure
Major war in the Middle East (Israel)
The aging of the population
Cancellation of offshore opportunities
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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)

6. Flight to Quality:
Fixed Income Bubble Burst
Distrust in Europe:
Lack of Refinancing

7. 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

8. 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

9. 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

10. Risk factors:
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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?)

11. 
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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)

12. 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

13. 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.

14. 
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
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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.

15. MiF 2015