Financial Crisis IV

Question 1

What did ECB do during financial crisis?

Answer 1

• Adapt interest rate to provide banks with liquidity
• buy government debt of most heavily affected EMU members
• Giving advice
• support creation of european financial stability facility
• support creation of european stability mechanism
• cooperate with IMF & EMU MS to support Greece and other affected MS

Question 2

what should ECB to to further contribute to solving the financial crisis

Answer 2

• Further adapt interest rates?
• Adapt minimum reserve requirement for banks
• buy more government debts of most heavily affected EMU member states?

Question 3

Role of rating agencies

Problem:

Answer 3

• are paid by banks and firms they are rating
• countries which get bad rating have to pay higher interest rate on their debts –> difficulties for countries increase –> difficulties for European Rescue Fund and ESM increase

Question 4

Role of rating agencies

How to solve the problem

Answer 4

establish a European Rating Agency?
Control rating agencies ?
transfer the tasks rating agencies to independent bodies?

Question 5

Government role

Answer 5

Beginning of the financial crisis:

• Most government increase their spending
• tried to increase regulation of banks

EMU: agreed on European financial stability Faculty
2013: 25 EU mS agreed on fiscal Compact (except UK, CZ): balanced budget rule to be implemented into national law by end 2013

Agreed on single baking supervisory authority for 130 biggest banks in EU to be accepted by ECB from end 2014

Question 6

what should EMU member government do now?

Answer 6

increase or reduce government spending?
establish stricter ruler fo doubtful securities?
Establish stricter rules for bankers?
Establish stricter rules for rating agencies?
Agree on issuing euro bonds?

Question 7

Different option for Euro Bonds

Answer 7

ECB issues Euro Bonds
EFSF / ESM issue Euro Bonds
Governments issue Euro Bonds up to 60% of GDP

Question 8

Consequences of issuing of Euro bonds

Advantages

Answer 8

• Interest rates for highly indebted counties will decrease

- Might be possible to rescue the Euro

Question 9

Consequences of issuing of Euro bonds

Disadvantages

Answer 9

• Interest rates for less indebted states increase
• Rating agencies might not rate euro bonds
• Incentives to conduct good government policies will decrease

Question 10

Financial transaction tax

Answer 10

Tay on financial transaction (currencies, securities, shares…)

advantages:
reducing speculation,
side effect: tax generation

Disadvantages:
distorting efficient allocation,
distorting well-function of financial system

Question 11

what could be done for prevent financial crisis

Answer 11

• introduce financial tax
• control rating agencies
• transfer rating agencies to an independent body
• increase minimum reserve requirement