(TIỂU LUẬN) GLOBALIZATION AND THE FINANCIAL CRISIS CONSEQUENCES AND SOLUTIONS OF FINANCIAL CRISIS

Key trends in globalization include: - Increasing international trade at a rate higher than the world economic growth - Increased international capital flows including foreign direct inv

MINISTRY OF FINANCE

UNIVERSITY OF FINANCE – MARKETING

FACULTY OF FINANCE AND BANKING

- - - 

-Lecturer name: Ph.D Phan Thu Hien Subject name: International Finance Group number: Group 3

Names of students: Phan Trung Dien

Thai Thuy Trang Huynh Ngoc My Hien Nguyen Thi Phuong Thuy Tran Cao Phuong Uyen

Evaluation table of the members' work completion

Phan Trung Diện Chapter 1: Globalization

and the financial crisis

95%

Nguyễn Thị Phương Thùy Chapter 2: Sign of

Thái Thùy Trang Chapter 3: Consequences

and solutions of financial

crisis

100%

Comments of the group leader: The members are all responsible and complete the work well as the assigned deadline.

CHAPTER 1: GLOBALIZATION AND THE FINANCIAL CRISIS 5

I Concepts and aspects of globalization 5

II Financial Crisis 5

1 Concepts 5

2 History of financial crisis and the global financial crisis 6

2.1 History of financial crisis 6

2.2 Global financial crisis 6

3 Basic crisis models 8

3.1 First-generation crisis model 8

3.2 Second generation crisis model 9

3.3 Third-generation crisis model 10

4 Types of financial crises 10

4.1 Banking crisis 11

4.2 Currency Crisis 11

4.3 Debt Crisis 11

5 Causes of the financial crisis 11

5.1 Financial leverage 12

5.2 Uncertainty and herd mentality 12

5.3 Incompatibility between debt and assets 12

5.4 Failure to regulate 12

5.5 Deceive 13

5.6 Spread 13

III Financial crisis and economic recession in the period 2007-2009 13

1 Cause 13

1.1 Securitization 13

1.2 Housing market bubble 14

2 Developments 14

3 Impact 15

3.1 The impact of the financial crisis on some economies around the world 15

3.1.1 For the United States 15

3.1.2 For some regions of the World 16

3.2 Impact of the financial crisis on Vietnam 18

3.2.1 Impact on import and export 18

3.2.2 Impact on remittances 20

3.2.3 Impact of net capital inflows on Vietnam's economy 21

CHAPTER 2: SIGNS OF FINANCIAL CRISIS 23

I Financial crisis overview: 23

II Signs of financial crisis: 23

1 Borrowers are unable to fully repay their bank loans: 23

2 Customer’s deposit cannot be refunded by commercial banks: 23

3 The government has abandoned the fixed exchange rate regime 23

4 Financial liberalization 23

5 The domestic banking system is debilitated and in a downturn: 24

6 Domestic financial supervision institutions have been reduced as well: 24

CHAPTER 3: CONSEQUENCES AND SOLUTIONS OF FINANCIAL CRISIS 24

I CONSEQUENCES OF FINANCIAL CRISIS: 24

1 Financial capitalism has been discredited 25

2 Significant wealth and middle-class decline 25

3 Unrest in politics: 25

4 Short-termism in fiscal and policy 25

5 Protectionism – each country for itself, and foreigners be damned 25

II SOLUTIONS OF FINANCIAL CRISIS 25

1 Solutions for avoiding financial crisis 25

2 Solutions to reduce the financial crisis's effects 26

REFERENCES 27

CHAPTER 1: GLOBALIZATION AND THE FINANCIAL CRISIS

I Concepts and aspects of globalization

Globalization is the increasing integration of the world's economies, especially throughtrade and financial flows Globalization can be identified through a few trends, most ofwhich began after the Second World War Among them is the growing international mobility

of goods, currencies, information, and culture; along with developing the technologies,organizations, regulatory systems, and infrastructure for this mobility

Key trends in globalization include:

- Increasing international trade at a rate higher than the world economic growth

- Increased international capital flows including foreign direct investment

- Increased cross-border data flows using technologies such as the Internet,communication satellites, and telephones

- Increase international cultural exchange, such as the export of cultural products such

Financial crises are one of two types of events:

- Mass withdrawals result in government shutdowns, mergers, or acquisitions of one ormore financial institutions

- If there is no withdrawal, closure, merger, acquisition or large-scale government helpfor a major financial institution, the strain on other financial institutions will begin

Some comparative characteristics between financial crisis and economic crisis.

Regarding the financial structure Regarding the structure of the economy

Financial asset prices (S&P 500,

NYSE…)

Output (GDP)

Asset price bubbles (stocks, real estate) The general price level of the economy

(inflation, CPI )The collapse of financial institutions Output decline, unemployment,

stagnation is production, inventoryInternational capital flows (FDI, FII,

international debt…)

Import and export relations of goods andservices

Impact on the real economy Impact on the monetary economy

2 History of financial crisis and the global financial crisis

2.1 History of financial crisis

- Dminique Plihon (2008): divides the financial crisis into 4 periods:

+ Gold standard period (1870 to 1914 centuries),

+ The period between the two World Wars (1914 - 1944),

+ Bretton Woods period (1944 - 1971),

+ Post-Bretton Woods (from 1971 to present)

- Research by Luc Laeven and Fabian Valencia (2008): period 1970 to 2007+ 124 systematic banking crises,

+ 208 currency crises,

+ 63 national debt crises

- Some typical financial crises:

+ Tulip fever in the Netherlands 1637

+ South Sea Company in England 1720

+ Great Depression and "Black Tuesday" in the US 1929

+ Debt crisis in Latin American countries in the early 1980s

+ "Black Monday" October 19, 1987

+ Speculative attack on the European Exchange Rate Mechanism 1992-1993

+ Crisis in Mexico 1994-1995

+ East Asian crisis 1997-1998

+ Crisis in Argentina 2001 – 2002

+ Global financial crisis since 2007

+ Eurozone debt crisis 2010 – 2012

2.2 Global financial crisis.

The "whirlpool" of bankruptcy continued to spread to large banks and financial groups

in the US, UK, EU, and many other countries In the UK, Northen Rock Bank was firstacquired on February 22, 2008, followed by Catholic Building Society (June 7, 2008),Alliance & Leicester (July 14, 2008) Derbyshire Building Society and Cheshire BuildingSociety (September 8, 2008) and most recently, Dunfermline Building Society (March 9,2009) In Denmark, on August 26, 2008, Roskilde Bank also had to accept the merger intothe Central Bank of Denmark The branches of the financial company Fortis in Germany,the Netherlands and Luxembourg were also sold to the Dutch and Belgian governments InIceland, continuously on October 7, 8 and 9, 2008, the Icelandic Financial SupervisoryAuthority nationalized Landsbanki, Glitnir and Kaupthing banks In Australia, BankWest (abranch of HBOS) was also "paid" by the Commonwealth Bank of Australlia (October 9,2008) In Kazakhstan, BTA Bank and Alliance Bank were also acquired by the government

on February 3, 2009 On March 29, 2009, the Central Bank of Spain also had to buy backCaja de Ahorros Castilla La Mancha (CCM) savings bank The world's major stock marketindexes continuously lost points in 2007-2008 and has only recovered slightly in recenttimes The Dow Jones Industrial Average (DJIA) fell from a record 14,164.53 points(October 9, 2007) to 6,547.05 points (March 9, 2009), down nearly 54% The ShanghaiStock Index (Shanghai Index) fell from 6,092.06 points (closed on October 16, 2007) to2,071.43 points (March 3, 2009), losing nearly 66% The NIKKEI 225 index fell to 7,068.03points (March 9, 2009) from a peak of 18,015 points (July 18, 2007), losing more than 60%

In June 2009, the Brooking Institution, one of the two major "think tanks" of the USgovernment, continued to reaffirm its perception of a "great global recession" when itreleased a report on a decrease in the economic growth rate economic growth of countries

in the world in 2009 According to this report, in the first quarter of 2009, the GDP growthrate of Germany decreased by 14.4%, in Japan decreased by 15.2%, the UK decreased by15.2% 7.4%, 18% in Latvia, 9.8% for the EU and 21.5% for Mexico

Although policies of "economic support" or "stimulus packages" worth hundreds ofbillions of US dollars have been launched by governments of many countries to "save" thesituation, economic experts The economy still must admit “this is a slow recovery processbecause it has to take into account the balance of balance sheets of households, businessesand financial markets.” However, according to Jorgen Elmeskov, chief economist at theOECD, “policy efforts have succeeded in limiting the severity of the recession and

encouraging a recovery to some extent that we wouldn't have dared to think about even 6months ago (Thus), now is the time to plan policies to get out of the crisis.”

3 Basic crisis models.

3.1 First-generation crisis model.

Paul Krugman (1979) and later Flood & Garber (1984) explained the mechanism thetransmission of a currency crisis is based on a simple monetary model called the first-generation crisis model Mainly characterizes current account crises under the condition offixed exchange rates being attacked by speculative activities This model occurs in somecountries with too weak macroeconomic background, severe budget deficit, excessivemoney supply (possibly due to the Government printing money to cover the budget deficit),causing inflation to fall increased development: These lead to a severe current accountdeficit Faced with the risk of the local currency depreciating, the government is forced tointervene uninterruptedly with the aim of maintaining a fixed exchange rate by sellingforeign currency to the market When foreign exchange reserves fall to a certain low level,speculative attacks begin to occur, along with insufficient macroeconomic fundamentals andeven an increase in foreign exchange reserves political and social tensions, at some point,the Government was forced to end the fixed exchange rate regime and change to a floatingexchange rate, causing the domestic currency to continuously depreciate and a currencycrisis occurred The model was most clearly depicted in the crises in several Latin Americancountries during the late 1970s, early 1980s and 1990s During the 1970s, Latin Americancountries borrowed large amounts of capital from abroad for infrastructure development.External debt increased from $75 billion in 1975 to $315 billion in 1983, equal to 50% of

the GDP of these countries The principal and interest payable in 1982 amounted to $66billion, up from $12 billion in 1975 In August 1982, Mexico declared its debt default.Banks do not allow Latin American countries to extend loans or rotate loans, causing thecurrency to depreciate, and real interest rates to rise As a result, Latin American countriesabandoned import substitution strategies.

The disadvantage of the model is that it relies on a simple macro model, which assumesevery object has perfect predictability The assumption that the two assets are local andforeign means that the government can only protect the fixed exchange rate fromdevaluation by directly selling foreign currency reserves The model's simple assumptionsallow us to describe the course of the crisis quite specifically, but it is clear that many othercrisis factors (not just the budget deficit) have been overlooked

3.2 Second generation crisis model.

The second-generation crisis model was developed by Obstfeld (1994 and 1995).According to this model, the government must make trade-offs between macro-objectives.Meanwhile, speculators will react based on expectations of the government's ability todevalue the currency The result was a self-fulfilling currency crisis The government'sstability is weakened by too expensive exchange rate protection measures (for example, bytightening the monetary policy, the interest rates are pushed up, which adversely affectingeconomic interests and job) Ahead of that signal, speculators can buy foreign currency bysell less local currency These pressures forced the Government to have no choice but todecide to abandon the fixed exchange rate regime in order to implement an expansionarymonetary policy in the face of the relentless onslaught of currency speculators, and theconsequent crisis panic broke out Another variation of the second-generation crisis modelstems from information imperfections and asymmetries In the condition that one or severalbanks have "problems", this situation leads to "herd" behavior, causing financial panic andultimately leading to a financial-currency crisis This pattern can be seen in the crisis of theEuropean Monetary System (European Monetary System) in 1992-1993

The disadvantage of the model is that it relies on a simple macro model, which assumesevery object has perfect predictability The assumption that the two assets are local andforeign means that the government can only protect the fixed exchange rate fromdevaluation by directly selling foreign currency reserves The model's simple assumptions

allow a fairly specific description of the course of the crisis, but it is clear that many othercrisis triggers (not just the budget deficit) have been overlooked

3.3 Third-generation crisis model.

The third-generation crisis model, developed by Yoshitomi and Ohno (1999),characterizes capital account crises in the balance of payments (Balance of Payment).Capital account crises often lead to "double" crises: a currency crisis and a banking crisis.This third model crisis is characterized by a twin crisis, which is a parallel between acurrency crisis and a banking crisis

4 Types of financial crises.

4.1 Banking crisis.

The theory of banking crises suggests that the instability (fragility) of the bankingsystem stems from the information asymmetry of the market, which is a situation in whichone party in an economic relationship or transaction can little information on the other side.According to the International Monetary Fund (IMF) definition: “A banking crisis is a state

in which banks fall into a state of massive withdrawals and go bankrupt Banks are forced tostop paying their commitments, or to avoid this, the government is forced to intervene withspecial support measures A banking crisis can break out in one bank and spread to the entiresystem.”

4.2 Currency Crisis.

A currency crisis, also known as an exchange rate crisis or a balance of payments crisis,occurs when currency speculation leads to a sudden devaluation of the local currency orwhen the central bank has to protect its currency own currency by raising interest rates or

by displaying large amounts of foreign exchange reserves

4.3 Debt Crisis

A debt crisis is a state in which a country, usually a developing country, is unable to payits debts as they come due

Besides:

When a currency crisis and a banking crisis occur at the same time, the situation is called

a double crisis of the first type Debt crisis often goes accompanied by the banking crisis,creating the phenomenon of double crisis and is called a double crisis of the second type

5 Causes of the financial crisis.

5.1 Financial leverage

Financial leverage can be understood as the borrowing of debt by individuals ororganizations for investment purposes Therefore, it is part of the cause of the financialcrisis if the borrower cannot repay the loan on time If the investor only uses the money hehas to invest, when he fails, the investor only loses the money he has Why does the default

of an entity lead to a financial crisis? Because when individuals or organizations borrowmoney, this increases income, but there is also the risk of failure, causing investors to take

on a large amount of debt This can spread to and affect financial companies and otherplayers in the financial market

5.2 Uncertainty and herd mentality

The crowd effect is not only popular in Vietnam but also in some other countriesespecially in the financial market When stage 1 investors see the potential of a security,they invest Only later did investors see this, some were afraid of missing out on anopportunity, optimistic that it would rise further, thus making the stock continue to rise Thataction made that security bear some pressure when it was not strong enough compared towhat investors came after expected It took a while for them to realize this, and they began

to sell them with fear This inadvertently caused the stock to drop without stopping and ittook a long time to recover

5.3 Incompatibility between debt and assets

One factor that contributes to financial market turmoil is an incompatibility between aninstitution's assets and liabilities If a bank cannot balance its short-term liabilities with itslong-term assets, it is likely to fall into a crisis That will happen when people rush towithdraw money from the bank while the company does not collect the debt in time due topart of long-term loans In particular, more and more banks are accepting deposits thatowners can withdraw when they need it If the bank does not manage this cash flow well,such as giving long-term loans to customers, it is easy to fall into default

As for the country size, when several governments in some countries issue bonds withforeign currency denominations This action can push the country into an imbalancebetween cash inflows (local currency) and debts from bond issuance (foreign currency).Once the exchange rate has high volatility or the country's foreign currency reserves areweak, the country is vulnerable to crisis

5.4 Failure to regulate

To avoid the risk of a crisis, the government has engaged in regulation in the financialmarkets The goal of regulation is to make markets transparent by actions such as requiringfinancial statements in accordance with the standards of financial institutions on a regularbasis This ensures financial institutions operate in a transparent and secure manner in terms

of capital, reserves and avoids lending institutions exceeding the prescribed limit

However, regulation is not always appropriate But this very failure of regulation alsobecame a cause of the financial crisis Over-regulation leads to a number of inadequaciesthat bind the development of financial institutions such as the Base II treaty This treatystipulates that when risks increase, financial institutions must increase their own capital Forsome organizations that cannot raise their own capital, they are forced to reduce theirborrowing to match their own capital according to the provisions of the treaty The treatywas heavily criticized and was partly to blame for the financial crisis

5.5 Deceive

When a financial institution fails, dishonesty also plays a part Institutions oftenpurposely fail to properly report their earnings, in order to attract investment with falsepromises The organization's failure to deliver on its promises and taking on the debts itconceals leaves the organization vulnerable to crisis For example, in 1994 in Russia, theMMM investment fund collapsed

The collapse of a financial institution will entail a huge consequence It is this troublethat will similarly spill over to other financial institutions This is called systematic risk Forexample, a bank A falls into default, then the psychology of a part of people feels that theydon't trust the bank anymore, so they simultaneously go to bank B to withdraw money Thismakes Bank B not able to keep up with capital turnover and easily fall into the samesituation as Bank A For example, at a national scale like 1997, the crisis in Thailand has

spread to Korea, Indonesia, …

III Financial crisis and economic recession in the period 2007-2009

1 Cause

1.1 Securitization

In 1970, securitization was born and in 2001 it started to thrive The birth of a series ofsecurities products such as Mortgage-Backed Security (MBS) and Collateralized Debt