GLOBALIZATION AND THE FINANCIAL CRISIS CONSEQUENCES AND SOLUTIONS OF FINANCIAL CRISIS

MINISTRY OF FINANCE UNIVERSITY OF FINANCE – MARKETING FACULTY OF FINANCE AND BANKING - - -  - - - ESSA Y TOPIC: FINANC IAL CRISIS Lecturer name: Ph.D Phan Thu Hien Subject name: International Finance Group number: Group Names of students: Phan Trung Dien Thai Thuy Trang Huynh Ngoc My Hien Nguyen Thi Phuong Thuy Tran Cao Phuong Uyen 0 Evaluation table of the members' work completion Name of member Phan Trung Diện Huỳnh Ngọc Mỹ Hiền Nguyễn Thị Phương Thùy Thái Thùy Trang Task Completion level Chapter 1: Globalization and the financial crisis Chapter 2: Sign of financial crisis Chapter 3: Consequences 95% 100% 95% 100% and solutions of financial Trần Cao Phương Uyên 95% crisis Comments of the group leader: The members are all responsible and complete the work well as the assigned deadline 0 CHAPTER 1: GLOBALIZATION AND THE FINANCIAL CRISIS I Concepts and aspects of globalization II Financial Crisis Concepts History of financial crisis and the global financial crisis .6 2.1 History of financial crisis 2.2 Global financial crisis Basic crisis models 3.1 First-generation crisis model 3.2 Second generation crisis model 3.3 Third-generation crisis model 10 Types of financial crises 10 4.1 Banking crisis 11 4.2 Currency Crisis 11 4.3 Debt Crisis 11 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 Cause .13 1.1 Securitization 13 1.2 Housing market bubble 14 Developments 14 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 0 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 Borrowers are unable to fully repay their bank loans: 23 Customer’s deposit cannot be refunded by commercial banks: 23 The government has abandoned the fixed exchange rate regime .23 Financial liberalization 23 The domestic banking system is debilitated and in a downturn: 24 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 Financial capitalism has been discredited 25 Significant wealth and middle-class decline 25 Unrest in politics: 25 Short-termism in fiscal and policy 25 Protectionism – each country for itself, and foreigners be damned 25 II SOLUTIONS OF FINANCIAL CRISIS 25 Solutions for avoiding financial crisis 25 Solutions to reduce the financial crisis's effects 26 REFERENCES 27 0 CHAPTER 1: GLOBALIZATION AND THE FINANCIAL CRISIS I Concepts and aspects of globalization Globalization is the increasing integration of the world's economies, especially through trade and financial flows Globalization can be identified through a few trends, most of which 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 as movies or books II Financial Crisis Concepts A financial crisis, in general, is a marked and rapid deterioration of all or most groups of financial indicators of an economy such as short-term interest rates, asset values, defaults, and failures of financial institutions Financial crises are one of two types of events: - Mass withdrawals result in government shutdowns, mergers, or acquisitions of one or more financial institutions - If there is no withdrawal, closure, merger, acquisition or large-scale government help for a major financial institution, the strain on other financial institutions will begin Some comparative characteristics between financial crisis and economic crisis Financial crisis Monetary economy Regarding the financial structure Financial asset prices (S&P Economic crisis Real economy Regarding the structure of the economy 500, Output (GDP) NYSE…) Financial investment Real investment 0 Asset price bubbles (stocks, real estate) The general price level of the economy The collapse of financial institutions (inflation, CPI ) Output decline, unemployment, stagnation is production, inventory International capital flows (FDI, FII, Import and export relations of goods and international debt…) Impact on the real economy services Impact on the monetary economy History of financial crisis and the global financial crisis 2.1 - History of financial crisis Dminique Plihon (2008): divides the financial crisis into 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 0 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 first acquired on February 22, 2008, followed by Catholic Building Society (June 7, 2008), Alliance & Leicester (July 14, 2008) Derbyshire Building Society and Cheshire Building Society (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 into the 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 In Iceland, continuously on October 7, and 9, 2008, the Icelandic Financial Supervisory Authority nationalized Landsbanki, Glitnir and Kaupthing banks In Australia, BankWest (a branch 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 back Caja de Ahorros Castilla La Mancha (CCM) savings bank The world's major stock market indexes continuously lost points in 2007-2008 and has only recovered slightly in recent times 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 Shanghai Stock Index (Shanghai Index) fell from 6,092.06 points (closed on October 16, 2007) to 2,071.43 points (March 3, 2009), losing nearly 66% The NIKKEI 225 index fell to 7,068.03 points (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 US government, continued to reaffirm its perception of a "great global recession" when it released 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 growth rate of Germany decreased by 14.4%, in Japan decreased by 15.2%, the UK decreased by 15.2% 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 of billions of US dollars have been launched by governments of many countries to "save" the situation, economic experts The economy still must admit “this is a slow recovery process because it has to take into account the balance of balance sheets of households, businesses and financial markets.” However, according to Jorgen Elmeskov, chief economist at the OECD, “policy efforts have succeeded in limiting the severity of the recession and 0 encouraging a recovery to some extent that we wouldn't have dared to think about even months ago (Thus), now is the time to plan policies to get out of the crisis.” Basic crisis models 3.1 First-generation crisis model Paul Krugman (1979) and later Flood & Garber (1984) explained the mechanism the transmission of a currency crisis is based on a simple monetary model called the firstgeneration crisis model Mainly characterizes current account crises under the condition of fixed exchange rates being attacked by speculative activities This model occurs in some countries with too weak macroeconomic background, severe budget deficit, excessive money 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 account deficit Faced with the risk of the local currency depreciating, the government is forced to intervene uninterruptedly with the aim of maintaining a fixed exchange rate by selling foreign currency to the market When foreign exchange reserves fall to a certain low level, speculative attacks begin to occur, along with insufficient macroeconomic fundamentals and even 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 floating exchange rate, causing the domestic currency to continuously depreciate and a currency crisis occurred The model was most clearly depicted in the crises in several Latin American countries during the late 1970s, early 1980s and 1990s During the 1970s, Latin American countries 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 0 the GDP of these countries The principal and interest payable in 1982 amounted to $66 billion, up from $12 billion in 1975 In August 1982, Mexico declared its debt default Banks not allow Latin American countries to extend loans or rotate loans, causing the currency to depreciate, and real interest rates to rise As a result, Latin American countries abandoned import substitution strategies The disadvantage of the model is that it relies on a simple macro model, which assumes every object has perfect predictability The assumption that the two assets are local and foreign means that the government can only protect the fixed exchange rate from devaluation by directly selling foreign currency reserves The model's simple assumptions allow us to describe the course of the crisis quite specifically, but it is clear that many other crisis 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 to devalue the currency The result was a self-fulfilling currency crisis The government's stability is weakened by too expensive exchange rate protection measures (for example, by tightening the monetary policy, the interest rates are pushed up, which adversely affecting economic interests and job) Ahead of that signal, speculators can buy foreign currency by sell less local currency These pressures forced the Government to have no choice but to decide to abandon the fixed exchange rate regime in order to implement an expansionary monetary policy in the face of the relentless onslaught of currency speculators, and the consequent crisis panic broke out Another variation of the second-generation crisis model stems from information imperfections and asymmetries In the condition that one or several banks have "problems", this situation leads to "herd" behavior, causing financial panic and ultimately leading to a financial-currency crisis This pattern can be seen in the crisis of the European Monetary System (European Monetary System) in 1992-1993 The disadvantage of the model is that it relies on a simple macro model, which assumes every object has perfect predictability The assumption that the two assets are local and foreign means that the government can only protect the fixed exchange rate from devaluation by directly selling foreign currency reserves The model's simple assumptions 0 allow a fairly specific description of the course of the crisis, but it is clear that many other crisis 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 a currency crisis and a banking crisis Types of financial crises 10 0 5.4 Failure to regulate To avoid the risk of a crisis, the government has engaged in regulation in the financial markets The goal of regulation is to make markets transparent by actions such as requiring financial statements in accordance with the standards of financial institutions on a regular basis 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 also became a cause of the financial crisis Over-regulation leads to a number of inadequacies that bind the development of financial institutions such as the Base II treaty This treaty stipulates that when risks increase, financial institutions must increase their own capital For some organizations that cannot raise their own capital, they are forced to reduce their borrowing to match their own capital according to the provisions of the treaty The treaty was 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 often purposely fail to properly report their earnings, in order to attract investment with false promises The organization's failure to deliver on its promises and taking on the debts it conceals leaves the organization vulnerable to crisis For example, in 1994 in Russia, the MMM investment fund collapsed 5.6 Spread The collapse of a financial institution will entail a huge consequence It is this trouble that will similarly spill over to other financial institutions This is called systematic risk For example, a bank A falls into default, then the psychology of a part of people feels that they don't trust the bank anymore, so they simultaneously go to bank B to withdraw money This makes Bank B not able to keep up with capital turnover and easily fall into the same situation 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 Cause 1.1 Securitization In 1970, securitization was born and in 2001 it started to thrive The birth of a series of securities products such as Mortgage-Backed Security (MBS) and Collateralized Debt 13 0 Obligation (CDO) made the market appear more actors before the two instead of just the borrower and the giver Borrow - get a mortgage from the borrower Accordingly, the insurance for these securitized products is Credit Default Swap (CDS); Structured Investment Vehicle (SIV) tools; Special Purpose Vehicle (SPV) institutions With many such forms being introduced, there are many systemic risks, so it is necessary to build a system capable of closely monitoring these risks But before the crisis, the United States had not done that and led to this crisis 1.2 Housing market bubble Buying speculative housing will cause a housing bubble, and once this bubble bursts, it will cause huge consequences For investors who use loans from banks to buy houses to hold for a long time and wait for prices to rise, when the market breaks, it will lead to loss of everything due to debt recovery by banks As a result, the foreclosure can't make up for the loans due to broken housing prices This caused many banks to fall into trouble In 2001, the Dot-com bubble burst To rescue the economy in a timely manner, the US Federal Reserve took action to reduce the interbank overnight lending rate from 6.5% to 1.75% Secondary credit also decreases accordingly, stimulating housing speculation Along with the permissiveness and riskiness of lending by financial institutions, the bubble peaked and burst in 2005 Developments 14 0 In August 2007, several US credit organization likes New Century Financial Corporation had to bankruptcy proceedings Others fell into the state of their stocks drop in price such as Countrywide Financial Corporation Many depositors at these credit institutions were anxious and take out their money from this, which cause a sudden surge in deposit withdrawals that made it even more difficult for those institutions The risk of credit constructed The real financial crisis Figure 1.Bankruptcy situation 2007- 2008 officially broke out Faced with that situation, the US Federal Reserve has taken methods to enhance the liquidity of the credit market, including conducting open market operations to buy US bonds, government bonds, etc US government and US government agency ensured by under housing credit In September 2007, the Federal Reserve also curtailed the interbank overnight lending ratio (Fed fund rates) from 5.25% to 4.75% Meanwhile, the European Central Bank has inoculated US$205 billion into the credit market to improve liquidity In December 2007, the crisis swiveled more serious when year-end economic summaries improvement the real estate market took longer than expected and the hierarchy of the crisis was also wider than expected Credit famine became clear The Federal Reserve System attempted to sharply cut the interbank rate in December 2007 and February 2008 but to no avail The Federal Reserve Bank of New York attempt to save Bear Sterns but was unsuccessful in March 2008 The company accepted to let JP Morgan Chase buy it back at $2 a share, which is much lower than its most costly pre-crisis price of $130.2 a share The failure of the Federal Reserve Bank of New York to successfully save Bear Sterns and let it be sold at too low a price has raised concerns about the possibility of intervention and rescue financial institutions when in trouble Bear Stern's collapse pushed the crisis to new higher levels In August 2008, it was the turn of Lehman Brothers, one of America's oldest and largest financial institutions, to go bankrupt Lehman was followed by a number of other companies In September 2008, the US Senate passed the Emergency Economic 15 0 Stabilization Act of 2008 allowing the US Treasury secretary to spend up to $700 billion to save the country's finances by buying back bad loans from banks goods, especially securities backed by real estate Impact 3.1 The impact of the financial crisis on some economies around the world 3.1.1 For the United States Since the end of the third quarter of 2007, the Dow-Jones Industrial Average has been steadily declining Since 12/2007, this problem has been the primary source of the US economy's slump This, according to the NBER, will be the first wave The United States is experiencing its worst recession since World War II From January to September 2008, an average of 84,000 US workers lost their jobs each month A slew of financial institutions, including some of the country's largest and longest standing, have gone insolvent, putting the US economy on the verge of default As a result of the financial crunch, businesses are cutting production, laying off staff, and reducing input contracts in the manufacturing sector Increased unemployment reduces income and, as a result, household spending, making it difficult for firms to market their products Many corporations have gone bankrupt or are on the verge of going bankrupt, including the three major American manufacturers, General Motors, Ford Motor Company, and Chrysler LLC The executives of these three automakers attempted, but failed, to persuade the US Congress for relief GM announced the temporary closure of 20 of its North American factories on December 12, 2008 Consumption declined, and 16 0 surplus goods led to a steady decline in the economy's overall level, putting the price US economy at risk of deflation 3.1.2 For some regions of the World Oil price (USD/barrel) has dropped sharply since mid-2008 due to a decrease in demand when the world economy deteriorated Because the United States is a major import market for many nations, when the economy is in a slump, many countries' exports suffer, particularly export-oriented countries in East Asia Japan, Taiwan, Singapore, and Hong Kong all experienced economic downturns Other countries' economies have slowed Europe, which has a tight economic tie with the United States, was severely impacted both monetarily and economically, with numerous financial institutions going bankrupt and certain countries, such as Iceland and Russia, experiencing financial crises Germany and Italy, the region's two largest economies, went into recession, while the UK, France, and Spain also slowed their growth The eurozone has entered its first recession since its inception Because Latin American economies are so intertwined with the US, when short-term cash flows out of the region and oil prices fall, they suffer as well Ecuador is on the verge of going bankrupt due to its debt 17 0 The world's economic development has slowed, resulting in lower demand for oil for production and consumption, as well as lower oil prices As a result, oil-exporting countries suffer At the same time, food speculation erupted in response to concerns about instability, contributing to high food prices in late 2007 and early 2008, resulting in a food price crisis reality on a global scale Many stock markets all around the world have been forced to wait for a significant stock depreciation As investors shifted their portfolios to safe haven currencies like the US dollar, Japanese yen, and Swiss franc, these currencies appreciated against a variety of other currencies, making exporting more difficult Imports from the United States, Japan, and Switzerland wreaked havoc on other countries' currencies, leading them to turn to the International Monetary Fund for assistance Korea is in the midst of a currency crisis Since early 2008, the won has been steadily depreciating 3.2 Impact of the financial crisis on Vietnam 3.2.1 Impact on import and export The obvious impact on exports is understandable as this is the most sensitive sector for many countries, not just Vietnam Our country is also affected a lot because it is considered a large and large foreign trade country; Vietnam used to be one of the 50 countries with the world's leading import and export turnover In addition, Vietnam's export turnover to the US, Japan and Europe is 52%, and the US alone accounts for 20.8% (Table 1) Because countries in this region are directly affected by the crisis, which directly affects Vietnam's export turnover Table 1: Proportion of imports and exports by trading partners of Vietnam in the period 2000 - 2011 (Đơn vị: %) Year ASEAN EU Taiwan Korea Hong Kong Japan China USA Australia Total 2000 18,1 19,6 5,2 2,4 2,2 17,8 10,6 5,1 8,8 89,8 2001 17,0 20,0 5,4 2,7 2,1 16,7 9,4 7,1 6,9 87,3 2002 14,6 18,9 4,9 2,8 2,0 14,6 9,1 14,7 8,0 89,6 2003 14,7 19,1 3,7 2,4 1,8 14,4 9,3 19,5 7,1 92,1 2004 15,3 18,8 3,4 2,3 1,4 13,4 10,9 19,0 7,1 91,6 2005 17,7 17,0 2,9 2,0 1,1 13,4 9,9 18,3 8,4 90,7 2006 16,7 17,8 2,4 2,1 1,1 13,2 8,1 19,7 9,4 90,6 18 0 2007 16,7 18,7 2,3 2,6 1,2 12,5 7,5 20,8 7,8 90,2 2008 16,5 17,4 2,2 2,9 1,4 13,5 7,7 19,0 6,9 87,5 2009 15,3 16,5 2,0 3,6 1,8 11,1 9,5 20,0 4,2 83,9 2010 14,3 15,8 2,0 4,3 2,0 10,7 10,1 19,7 3,7 82,7 2011* 17,5 12,3 5,3 9,1 1,6 10,7 18,1 10,9 2,4 87,8 Source: The author calculates from the data of Import and export turnover by country, major country and territory, General Statistics Office In 2007, Vietnam's exports increased steadily over the months (Table 2) By July 2008, exports began to show signs of decreasing; In 2009, export turnover increased again in the first two months, but it was still not equal to before the fall in 2008 The average price of export items of oil, rubber, rice, etc all went down; textiles, pepper, cashew, and wood exports to the US, Japan, and the EU decreased by 20-30%; signing new export contracts with difficulties; many export contracts have been postponed or postponed to 2009 The export turnover data in 2009 show some positive signs but in essence this improvement is only superficial turnover increased New export turnover stabilized back to pre-crisis levels at the end of Q1 2010 Table 2: Import and export situation of Vietnam in the period 2007-2012 (Unit: Billion USD) 2007 Export 3,76 Import 4,33 Balance -0,57 of trade 2008 Export 4,91 Import 7,20 Balance -2,29 of trade 2009 Export 3,83 Import 3,42 Balance 0,41 of trade 2010 2,89 3,44 3,86 3,64 4,08 4,43 4,45 5,28 10 11 12 4,17 4,25 4,30 3,77 4,30 4,50 4,68 4,96 5,22 5,29 4,90 5,60 6,00 4,33 -0,60 -0,60 -0,80 -1,20 -0,80 -1,00 -1,00 -1,10 -1,30 -2,00 0,35 3,33 6,04 4,83 5,00 5,75 8,07 8,24 7,67 10 6,20 6,55 6,00 5,27 5,04 6,93 7,30 6,28 5,51 5,71 11 12 4,80 4,67 5,30 - -2,70 -3,20 -3,20 -1,90 -0,70 -0,80 -0,30 -0,20 -0,70 -1,00 10 11 12 5,08 5,33 4,28 4,44 4,81 4,81 4,62 4,61 5,07 4,76 5,47 4,22 5,10 5,46 5,56 5,98 6,38 5,94 6,61 6,76 6,83 7,40 0,86 0,23 -1,18 -1,12 -1,17 -1,57 -1,32 -2,00 -1,69 -2,07 -1,93 Export 5,08 3,72 5,60 5,46 6,31 Import 6,06 5,11 6,81 6,68 7,21 11 12 6,70 7,543 6,32 6,07 6,94 6,212 6,282 8,05 8,829 7,07 7,10 7,42 7,095 7,396 Balance 10 -0,98 -1,39 -1,21 -1,22 -0,90 -0,75 -1,03 -0,48 -0,88 -1,11 -1,35 -1,29 of trade 2011 10 11 12 Export 7,36 4,95 7,66 7,57 7,35 8,58 9,40 9,40 8,20 8,43 8,93 9,10 19 0 Import 8.22 Balance -0,86 of trade 2012 Export 6,5 Import 6,6 Balance -0,1 6,18 9,06 9,06 9,01 8,79 8,40 10,1 9,58 9,24 -1,23 -1,49 -1,49 -1,66 -0.21 1.0 -0.7 -1,38 0,81 8,2 9,0 -0,8 9,8 10,0 -0,2 9,7 9,8 -0,1 9,2 9,3 -0,1 8,6 9,0 -0,4 9,1 9,8 -0,7 9,8 9,9 -0,1 9,6 9,5 -0,1 9,58 9,36 -0,65 -0.26 10 11 12 9,9 10,2 10,4 10,4 10,3 10,6 -0,5 -0,1 -0,2 of trade Source: Compiled from the monthly “Import and export situation” of the General Department of Customs At the same time, Vietnam's imports are also significantly affected: In order to export, our country must have raw materials, but most of them are imported from abroad and account for 70% to 80% of the total The crisis caused the price of oil, steel billet, technological equipment to drop sharply In February 2009, the economic stimulus package was implemented by the state As a result, by March, the trade deficit increased again Vietnam was disadvantaged in that context because our country had a growing trade balance deficit due to importing raw materials for production To solve this problem, money sources are injected in our country to make up for that shortfall, but the risk is reduced Therefore, the risk of increasing debt and reducing national foreign currency reserves 3.2.2 Impact on remittances Remittances are important as they are one of the major cash flows to our country The most obvious source of money is those who export labor, international students, and relatives abroad Currently, the amount of remittances is increasing year by year (about 10%) per year, it is expected to grow even more Remittances in the period 1996 - 2011 (Unit: million USD) Source: IMF (2011) 20 0 The source of remittances is increasing over time due to More and more people are going to work abroad, Vietnamese experts, and international students to work and study abroad; There have been many changes in policy and because the money transfer procedure is also becoming simpler, the forms of money transfer are more and more diversified, and the institutions that carry out the money transfer are more and more diversified The source of remittances in 2009 decreased because: The export labor market is and will face many difficulties Many laborers must return home due to lack of work; Vietnamese relatives living abroad also have their incomes reduced due to the financial crisis Moreover, the source of remittances not only supports relatives but also invests in production activities, securities, and real estate These are the areas where the rate of return is falling, so they no longer attract remittances as before Currently, Vietnam does not have an effective solution to attract remittances into official remittance channels 3.2.3 Impact of net capital inflows on Vietnam's economy Through the policy of loosening investment barriers, accelerating the opening of capital markets and liberalizing financial markets, Vietnam's net capital inflows have increased rapidly year over year, especially since 2007 In the structure of capital inflows, direct investment capital (FDI) still accounts for a large proportion and has relatively stable growth Indirect investment (FPI) has only appeared since 2005 but has shown its flexibility and danger to the foreign currency flow of the economy FPI rose sharply in 2007 (US$6.243 million) when the Vietnamese stock market exploded at the same time that Vietnam became an official member of the WTO, then quickly reversed in 2008 (US$-578 million) when the stock bubble burst and fell sharply in 2009 Other investment capital (OI), with the majority being credit and bank assets, is the capital flow that is increasingly accounting for a high proportion in the capital account balance Net inflows from 2000 to 2011 (unit: million USD) 20000 15000 10000 5000 0 11 20 10 09 20 20 08 07 20 20 06 20 05 04 21 20 20 03 02 20 20 01 00 20 20 99 98 19 19 97 19 96 19 19 -5000 95 Source: IFS (2012) However, capital inflows also have notable effects: First, massive net capital inflows put pressure on the money supply, causing inflation to rise The massive amount of indirect investment capital in the second half of 2007 and the first quarter of 2008 led to a decrease in the exchange rate and in order to keep the exchange rate stable, the State Bank made intervention transactions in the market Forex As a result, the amount of money circulating in the economy increased rapidly, leading to a high CPI with a peak of 27.7% in the third quarter of 2008 and up to 23.9% at the end of 2008 Capital inflows and quarterly CPI for the period 1999 - 2011 6000 30.00% 5000 25.00% 20.00% 4000 15.00% 3000 10.00% 2000 5.00% 1000 0.00% -5.00% Luồồng vồốn vào CPI (%) Source: Compiled from IFS (2012) Second, capital inflows into Vietnam contribute to overheating the economy, creating asset bubbles, and affecting system liquidity Along with massive capital inflows, credit growth in Vietnam in the 2007-2010 period was always high, with an average rate of 36.5% Third, the massive capital inflow poses the risk of a currency crisis Although FPI has just appeared, it has shown its erratic volatility when it continuously increased strongly in 2007 and then reversed rapidly in 2008 on the balance of payments That volatility is due to the following reasons: In the context of a global recession, financial institutions and investors had to rethink their investment strategies and portfolios, leading to the sale of securities to recover capital Foreign investors, who are holding 40% - 50% of transaction value and about 25% - 30% of stocks on Vietnam stock market have withdrawn capital; The psychological impact of the global financial crisis on the global stock markets, reflected in the VN-Index continuously finding new bottoms and falling to a record level of 252.57 points on February 24, 2009; the economy showed signs of going down and there was a sharp and rapid change in monetary policy such as rising inflation, the SBV tightened 22 0 monetary policy, the trade deficit became more and more serious, reserves decreased; Foreign organizations provide unfavorable information such as Fitch Ratings lowering the credit rating of Vietnam from "stable" to "negative", Morgan Stanley believes that a currency crisis may occur in Vietnam CHAPTER 2: SIGNS OF FINANCIAL CRISIS I Financial crisis overview: Financial crisis is the tumble of financial markets or financial corporations mislay their liquidity, leading to a chain collapse in the financial system II Signs of financial crisis: Borrowers are unable to fully repay their bank loans Customer’s deposit cannot be refunded by commercial banks The government has abandoned the fixed exchange rate regime Financial liberalization Weaknesses in the financial system, particularly among domestic banks Poor supervisory institutions Borrowers are unable to fully repay their bank loans: Consumers get a loan from the bank and they inability to pay this loan, late payment or just pay only part of the loan, that induce bankruptcy Customer’s deposit cannot be refunded by commercial banks: Financial or business risks lead to loss of the bank’s asset, a decrease in profit or the bank must spend a cost to solve those risk problems Among the risk faced by commercial bank, credit risk is the greatest impact on the financial position of the bank When the credit risk is happening, banks unable to recover capital, which cause revenue and expenditure imbalance and maybe falling into insolvency, cannot give back the client’s credit This will cause insolvent of commercial bank system The government has abandoned the fixed exchange rate regime Fixed exchange rate is the structure adopted by the authority or central bank to keep the value of another currency at a specific rate If the government is given up the fixed exchange rate regime, the central bank would be free to increase (decrease) money supply, which would result in inflation and long-term inflation will cause financial crisis Financial liberalization 23 0 According to the International Monetary Fund (IMF): “Financial liberalization is the process of reducing and ultimately eliminating State control over the functioning of the national financial system, making it operate more freely and more efficiently according to the laws of the market" The process of liberalization will make the financial markets of countries; especially developing countries are more affected Financial liberalization may increase the likelihood of a financial crisis even further Two problems arose: Firstly, the domestic financial market is not yet fully developed, which is open to financial integration with foreign partners that will be vulnerable to external financial attacks Secondly, financial integration also increases the chain crisis from the outside market to the internal country’s market The domestic banking system is debilitated and in a downturn: Many credit institutions are experiencing liquidity issues, and high bad debts are threatening the stability of the banking system and causing temporary liquidity shortages at banks This destabilizes the system, resulting in the failure and insecurity of banking operations beyond the State's control Domestic financial supervision institutions have been reduced as well: To suit the country's economy, each state will use a different financial model However, if the model is not properly applied or the financial system is not fully developed, the supervisory capacity and legal system related to supervisory activities are in the process of being perfected and are not yet sufficiently strong, resulting in the financial system's inability to develop healthily and sustainably CHAPTER 3: CONSEQUENCES AND SOLUTIONS OF FINANCIAL CRISIS I CONSEQUENCES OF FINANCIAL CRISIS: Although the economic crisis in 2008 broke out more than 10 years ago, it still left many consequences that have lasted until now The cause of the Great Recession that year can be said to have originated from the US real estate market, which a link in the financial system was severed, which set off a chain reaction, pulling a chain reaction Followed by a series of bankruptcy declarations, including the financial firm Lehman Brothers This crippled the entire US and European economies 24 0 Using the Multiple Cause model (MIMIC), which was carried out in 107 countries and synthesized about 60 causes of the world financial crisis The impact of this recession is still present, making the speed of the global economic recovery quite weak It will depend on what it does There are consequences of the financial crisis: Financial capitalism has been discredited • The notion that financiers are competent and, as a result, deserve their fortune • Simple techniques — at the extreme, Bernie Madoff Suspicion that a large number of Madoffs are involved • Concerns about capitalism's ability to distribute wealth and resources Significant wealth and middle-class decline • Less support for property rights and low taxation • A focus on inequality Unrest in politics: • Those who are losing or have previously lost • In the United States, where is the unrest? So far, all of the attention has been focused on the election campaign and Obama's ascension to power • Make a plea for robust government assistance • This is especially problematic for emerging markets, which have experienced rapid growth and have high expectations • Unemployment and health insurance are both weak safety nets Short-termism in fiscal and policy • Fix the problem, the future be ruined — the image of doing something is all that matters • More money is the answer, regardless of spending efficiency — just around $150 billion of the $800 billion plus package will be spent in the United States by the end of fiscal year 2009 Protectionism – each country for itself, and foreigners be damned • Trade • Financial – assurances, now liquidity • Employment • Fiscal – suffocate thy neighbor 25 0 II SOLUTIONS OF FINANCIAL CRISIS Solutions for avoiding financial crisis - Floating exchange rates will take precendence over other types of rates which may collapse - To defend the banks from a liquidity crisis, it is crucial to creat up foreign exchange reserves - Banks and the financial sector should be supervised more carefully - Take initiatives to eliminate debt in the private and public sectors to reduce the risk of insolvency - Structural measures to enhance the competitiveness of the real economy Solutions to reduce the financial crisis's effects To begin, undertake a series of anti-inflationary measures, focusing on maintaining a tight but flexible and prudent monetary policy based on the market mechanism Use monetary tools effectively and alter them as market conditions change Renovating the bank's internal management to make it more resilient to the effects of the global economic crisis Secondly, to increase production and business, as well as to enact laws that exempt and reduce corporate income taxes, particularly for small and medium-sized businesses In the last quarters of the year, focus on removing obstacles and establishing conditions to improve production and commercial activity In the event of excessive inflation and an economic downturn, the government will need to implement suitable stimulus measures to help the economy recover Third, keep a careful eye on the sources of foreign investment money, continue to strengthen the investment climate, and boost promotion of foreign invesment Finally, by bailing out the open market operations within the banking industry and discount from the central bank lending to commercial banks, supply liquidity to the market 26 0 REFERENCES [1] https://www.academia.edu/27608065/Khủng_hoảng_tài_chính_suy_thối_kinh_tế_và_sự_p hục_hồi? fbclid=IwAR2ZHeW3Zgojf5NNzeKNFffNF34OqYJxucVPYKbYE4_Ca0SB_rs29u6YQm [2] https://pt.slideshare.net/tutor2u/consequences-of-financial-crises [3] https://www.slideserve.com/ham/the-causes-and-consequences-of-the-financial-crisis [4] https://academy.binance.com/vi/articles/the-2008-financial-crisis-explained [5] http://en.wikipedia.org/wiki/List_of_acquired_or_bankrupt_banks_in_the_late_2000s_finan cial_crisis [6] http://www.mdleasing.com/djia.htm [7] http://www.chinesestock.org/show.aspx?id=36315&cid=21 [8] http://www.marketwatch.com/story/nikkei-marks-lowest-close-26-years [9] Cowry Research (2009), 2009 Half Year Financial Market Review, Cowry Asset Management Ltd., pg [10] http://www.cowryasset.com/uploads/reports/2009%2520HALFYEAR %2520FINANCIAL%2520MARKET%2520REPORT.pdf [11] http://www.bloomberg.com/apps/news?pid=20601103&sid=axLRIVF3w3Ns [12] http://www.dankinhte.vn/cac-mo-hinh-khung-hoang-kinh-te/ 27 0 ... 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 11 0 Causes of the. .. History of financial crisis and the global financial crisis .6 2.1 History of financial crisis 2.2 Global financial crisis Basic crisis models ... reduce the financial crisis' s effects 26 REFERENCES 27 0 CHAPTER 1: GLOBALIZATION AND THE FINANCIAL CRISIS I Concepts and aspects of globalization Globalization is the increasing