Dr.

Nguyen Thanh Hai Frankfurt and Hanoi April 2011

Causes of Global Finance Crisis 2. Policy Reaction (hier mainly Monetary Policy) 3. Recommendations for Vietnam
1.

1 . The massive interest rate cuts by central banks + cheap supply of money by the banks since 2000 2. Speculative investment in assets (especially real estate, stocks and risky securities with high returns but also raw materials), thus rapidly increasing prices 3. Concealment of the risks through CDS and MBS 4. failure of risk management and finance supervision 5. Fighting the inflation and central banks raise interest rates 6 . bursting of the housing bubble and falling Prices 7 . Systematic failure of financial institutions + the bankruptcy of Lehman Brothers as a system break 8. spread of the financial crisis of U.S. to the rest of the world (as they have similar pattern with different intensity and volatility) 9 . The global financial crisis + world economic recession

Monetary policy operations and ECB rates

%

6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2000 2001 2002 2003 2004 2005 2006
Deposit facility

2007
EONIA

2008

Tender rate / Main refinancing rate

Marginal lending facility

1000 200 900 800 150 Home Prices

Index Population in Millions

700 600 500

100 400 Building Costs 50 300 Population 200 100 0 1880 0 2020

1900

1920

1940 Year

1960

1980

2000

2. Policy Reaction (hier mainly Monetary

Policy)
1 Global financial crisis + Weltwirtchaftrezession 2 Reactions of the central banks and governments 3 Rescus parkete and economic stimulus programs 4 massive cuts in interest rates to near 0% and liquidity and quantitative easing by central banks 5 increased indebtedness of the states 6 Inflation is rising again and debt crisis 7 Exist Strategy 8 Central Banks raise interest rates again and tight monetary policy and goverments set budget saving programs 9 The circle has closed and a new round begins.

-The bailout programs in the U.S. is 700 billion U.S. $, etc. also increasing the deposit guarantee to 250 000 U.S. $ and a tax cut of $ 100 billion (Ermerging Economic Stabilization Act October 2008). -After that, the U.S. government further Banks Capital Purchase Program in value of U.S. $ 250 billion, including $ 100 billion for the four largest banks. -In Euro-Zone includes the bailout program also 1 000 billion , of which Germany alone has a rescue plan of 500 billion euros and France set up with 320 billion . - The IMF has also provided a funding plan for the global financial crisis in value of 1 000 billions US Dollar. - The Federal Reserve has with the global financial crisis 1 300 billions US Dollar Asset Purchase implemented programs, inter alia also toxic paper is bought to supply the market with fresh money to save the illiquid banks. - Fed has a credit plan for direct lending for large corporations in value of U.S. $ 900 billion. - Overall, bailout programs of the U.S. cost almost 3 000 billions U.S. Dollar - here I do not go into further details, see Austin Murphy in which he estimates the loss by the global financial crisis level of 10 000 billions. U.S. Dollar. -In October 2010, the Fed decided to buy Treasuries directly ($ 600 billion in value, monthly U.S. $ 75 billion). When looking at the reinvestment of previous asset-purchase program, then increase this purchase program by June 2011 even U.S. $ 900 billion (110 billion U.S. $ per month). - hier briefly the stabilization fund and stabilization mechanism in Germany and Europe:
-fly described the example of the stabilization fund by Germany for the financial market (SoFFin), on 18 October was gegndet 2008 (with the following tasks: acquisition, Garrantie, recapitalization and assumption of the risk position of financial institutions) and the EFSF from Europe and used for this purpose the support of the IMF, and the permanent stabilization mechanism in mid-2013 (Here is the rescue of 750 billion Euro for the highly indebted countries did not mention the euro, see Scho Ebert, Federal Bank):

-Here, briefly described the example of the stabilization fund by Germany for the financial market (SoFFin), on 18 October was gegndet 2008 (with the following tasks: acquisition, Garrantie, recapitalization and assumption of the risk position of financial institutions) and the EFSF from Europe and used for this purpose the support of the IMF, and the permanent stabilization mechanism in mid-2013 (Here is the rescue of 750 billion Euro for the highly indebted countries did not mention the euro, see Scho Ebert, Federal Bank): Here, briefly described the example of the stabilization fund by Germany for the financial market (SoFFin), on 18 October was gegndet 2008 (with the following tasks: acquisition, Garrantie, recapitalization and assumption

of the risk position of financial institutions) and the EFSF from Europe and used for this purpose the support of the IMF, and the permanent stabilization mechanism in mid-2013 (Here is the rescue of 750 billion Euro for the highly indebted countries did not mention the euro, see Scho Ebert, Federal Bank):

A number of countries have now set up at the world economic recession in 2009, large fiscal stimulus packages: - USA: economic stimulus package in February 2009 $ with a volume of 789 billion, equal to 6.5% GDP, including 30% for the tax cut , for the construction of infrastructure and creation of 3 million jobs. - Germany: Economic Stimulus Package I in January 2009 was 50 billion, equal to 1.6% of GDP, of which 17.3 billion for infrastructure. - China has a $ 468 billion US Dollar economic stimulus package, about 10% of GDP - Vietnam has two economic stimulus packages planned $ 8 billion equal to 8.5% of GDP, the actual expenditure is less than planned, of which U.S. $ 1 billion for the interest subsidy of 4%.

The stimulus packages have increased state budget deficit and rising public debt (as of end 2010 USA: 98% of GDP, Japan: 201% of GDP, Germany: 83% of the GDP for Europe, see the table below as of the end of 2009 and Vietnam 56% of the GDP in late 2009 and estimated at 61% of GDP end-2010)

Until now, all central banks have begun their Exist strategy and implemented, as inflation in all countries back. -Be the first central bank, the Reserve Bank of Australia increased its benchmark interest rate at the end of 2009 and until now have another 4 times to 4,75%. -As a further major central bank also Poeble Bank of China since early 2010 has 4 times the prime rate and 5 times to increase the reserve requirement ratio to fight the high inflation, 5,4% in March 2011. -ECB in April 2011 as the first Plays its key interest rate increased by 0.25% to 1,25%, further interest rate moves will follow this year, CPI in Euro-Zone is 2,8% in April 2011. -Fed has just announced to stop the bond purchase program on schedule in June 2011. Fed interest rate adjustment is only a matter of time, because the CPI in March 2011 rise in U.S. already at 2.7%.

Exist strategy of most central banks in the world means rising interest rates and rising funding costs, the already rising on the prices of raw materials . 2. Vietnam as a small open, macroeconomic very unstable . The external factors will be very bad (increasing import prices, rising external financing costs ...). 3. In response, Vietnam has 2 options: a. the macroeconomic equilibrium and stability must be restored. 2. to restructure the economic and to reduce the dependence on external factors.
1.

- Vietnam has in the past 10 years 2001-2010 a strategy that attaches to the growth as its high priority and without attention on the macro economic equilibrium and stability. - The new economic strategy 2011-2020 of Vietnam wanted to correct that mistake and focus on stability and substainability.

- Before the global financial crisis, Vietnam has in 2007, a capital inflow rate of almost 25% of GDP. This factor was combined with an expansionary monetary and fiscal policies, causing the inflation up to 28% (March 2008), because from my Calculation, the SBV can sterilized only about 60% of the 10 billion U.S. $ - purchases (of which about $ 6 billion hot money). -A capital control, or at least no further capital liberalization Vietnam had made some protection for Vietnam Economy. -The IMF is fundamentally opposed to capital controls, but has recently recommended that step yet.

-In the global financial crisis, Vietnam didnt need

bailout programmes for financial institutions, but more than 10 small banks needed the SBV refinancing to protect them on bankcrupcy. SBV set realy a system and institutional protection. -After the global financial crisis should cease this institution protection. All difficulties of monetary policy in the last 3 years arise because of this institution protection. M & A among banks and financial institutions should not be a taboo, but a normal business in Vietnam. This facilitates the banking supervision and risk management.

-The first short-term successes of De-Dollarization in

the second quarter of 2011 must be supported by futher medium-and long-term measures (including reducing dollar loans, import surplus, particularly with China, the government budget deficit and public investment, including the SOEs .... ). -The De-Dolarization is so far successful that the SBV can now increase foreign exchange reserves, but must be accompanied with fully consistent Sterilization through the Open market Operation OMO to keep the fighting inflation.

-In the global financial crisis, the SBV has no quantitative easing, as the interbank money market has been continued operating in Vietnam. -Vietnam begun implemented very early the Exist Strategy (on 25 Nov 2009, the base rate increased from 7 to 8%) while the inflation was already increasing at that time. But these Exist Strategy was unfortunately not consistent implemented in 2010, - So must be introduced in early 2011 dramatically restrictive monetary policy (loan interest rates rise back up to 20-25%, which means that business will be scollaped, GDP may be increasing in 2011 only 6.5% - Goverment goal is 7 to 7,5%.)

The Conclusion for Vietnam must be: 1. Vietnam has to reach the long-term strategy of stability-oriented economic and monetary policy. 2. This mean for monetary policy,: a stable money supply (not pumped by political will) and an action program to create confidence in the VND (including a consistent midd-term De-Dolarization, a in the public predictable monetary policy, a relatively independent position of the central bank .. .). 3. I believe that Vietnam does not need a stabilization fund for the financial market, but a Stabilization Mechanism, which will be etablish in to market institutions (a healthy, market-based financing of budget deficit with a liquid bond market, an adequate deposit insurance as well as an effective and risk based financial supervision, a functioning risk management) 4. by the macro economic stability must be included a lower budget deficit, balanced trade and current accounts, low inflation below 5%, a stable exchange rate, ...).

Thank you