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The world financial instability and the Euro zone crisis - Chapter 3 Jacques SAPIR CEMI-EHESS

The world financial instability and the Euro zone crisis - Chapter 3 Jacques SAPIR CEMI-EHESS. 3 The December 2011 crisis and its partial solutions. 1. A ra pid worsening of the Crisis since August 2011 and the quick increase of interest rates. The degradation of long-term rates.

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The world financial instability and the Euro zone crisis - Chapter 3 Jacques SAPIR CEMI-EHESS

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  1. The world financial instability and the Euro zone crisis - Chapter 3Jacques SAPIRCEMI-EHESS

  2. 3The December 2011 crisis and its partial solutions

  3. 1. A rapid worsening of the Crisis since August 2011 and the quick increase of interest rates. • The degradation of long-term rates. • An indicator of general solvency market estimates. • The process of de-uniting the Eurozone. • The degradation of short-term rates. • Short-term worries. • The speculative dimension. • The “spreads”. • How are they computed. • What the study of historical movement is teaching us. • The destruction of the only real asset of the Euro zone: lower interest rates for all. • Were low rates have been a financial bubble?

  4. Italy (10 Y)

  5. Italy 2 Y

  6. Spain 10 Y

  7. Spain 2 Y

  8. Belgium 10 Y

  9. Germany 10 Y

  10. France to Germany spreads (10Y)

  11. Interest rates have climbed to unseen levels before dropping down following the ECB intervention. • Could this situation be sustained? • Is the ECB really “monetizing” the debt? • Interest rates on Sovereign and Corporate debts? • The spread of French rates to German ones is now on par to what has been the situation before the introduction of the Euro zone. • Even after the dropping down of interest rates, levels are still much too high for countries like Italy and Spain. • Italy: a problem with the accumulated debt. • Spain: Public finance out of control? • Insolvency or a simple liquidity crisis? • External solvency. • Internal solvency.

  12. 2. Bank on the brink: the stress-test issue and the liquidity crisis. • What a stress-test is. • Theoretical view: a “worst case simulation”. • The critical importance of inserting realistic assumptions. • The intra-European debt market. • Sovereign debt • Corporate debt. • The CDS on banks are very high and banking sectors all over Europe have seen their valuation coming down. • The development of a new market. • CDS at bay: Greece. • What would be a world without CDS? • The collapse of the intra-European debt market.

  13. 3. The collapse adverted or only postponed? • Why the risk of a collapse was real by early December 2011. • The quick rise of interest rates on Italy and Spain. • The collapse of the short term intra-bank liquidity market. • The evil synergy between the bank crisis and the sovereign debt crisis. • The political reaction. • The December 9th summit: no place for disagreements. • The European Central Bank and its brinkmanship.

  14. Conclusion: Problems still unsolved. • The “budget federalism” so far concerns only the expenditure side of State budgets. • No real transfers. • Fiscal discipline and Growth. • Political worries. • The disciplinarian side of the December 9th agreement is subject to a lot of critics and of adjustments. • There is still no solution to the recessive effects of “austerity plans” and the EZ could well be on a deflationary path.

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