1. The European sovereign debt crisis Irwin Collier, member International Advisory Board Kyiv School of Economics

2. Financial Intermediary Balance Sheet Kyiv School of Economics, 6 October 2011 Assets (youown) Liabilities (youowe) OPM = otherpeople'smoney, (claims on you such asdeposits, short-termcredits) YSIG = yourskin in thegame (Equity, a.k.a. networth)

3. Leverage ratio = OPM÷YSIG Kyiv School of Economics, 6 October 2011 Assets (youown) Liabilities (youowe) OPM = otherpeople'smoney, (claims on you such asdeposits, short-termcredits) YSIG = yourskin in thegame (Equity, a.k.a. networth)

4. Financial Intermediary Balance Sheet Kyiv School of Economics, 6 October 2011 Assets (youown) Liabilities (youowe) CYA = cover yourass[ets] (highlyliquidreserves, requiredorprudential) OPM = otherpeople'smoney, (claims on you such asdeposits, short-termcredits) OPP = otherpeople'spromises (Assetsworkingforyou) YSIG = yourskin in thegame (Equity, a.k.a. networth)

5. Financial Intermediary Vulnerability 1: “bank-runs” Kyiv School of Economics, 6 October 2011 Assets (youown) Liabilities (youowe) OPM = otherpeople'smoney, [yourdepositorschoosetoleavesuddenlyen masse, oryoubecomeunableto roll-overdebt] CYA = cover yourass[ets] (highlyliquidreserves, requiredorprudential) OPP = otherpeople'spromises (Assetsworkingforyou) YSIG = yourskin in thegame (Equity, a.k.a. networth)

6. Financial Intermediary Vulnerability 2:assets turn “toxic” Kyiv School of Economics, 6 October 2011 Assets (youown) Liabilities (youowe) OPM = otherpeople'smoney, [yourdepositorschoosetoleavesuddenlyen masse, oryoubecomeunableto roll-overdebt] CYA = cover yourass[ets] (highlyliquidreserves, requiredorprudential) OPP = otherpeople'spromises [These promisesarebrokenbecauseassetpricebubblesburst, fearsofdebtordefaults] YSIG = yourskin in thegame (Equity, a.k.a. networth)

7. Kyiv School of Economics, 6 October 2011 Source: Wall Street Journal data from 31 Dec 2010

8. Illiquidity vs Insolvency Last-resort lending: become the source of “other people’s money” to increase “cover your own ass[ets]” Bailing-out: recapitalizing by swapping the bad “other people’s promises” with liquid and safe assets to bolster “own skin in the game” Swedish-solution: government takes over failed financial institutions, restructures to reprivatize. Kyiv School of Economics, 6 October 2011

10. Bail-outs can likewise be rejected by taxpayers in the countries running export surpluses and/or owed the money

11. One fiscal-monetary policy does not fit all, certainly not yet. The ECB has a European-scope, but no such common fiscal authority.Creation of the euro but especially expansion of the euro-zone let politics get ahead of economic integration. European financial markets completely interwined. Complete unwinding would be a disaster. Hard to imagine any solution beyond a deal to forgive a big chunk of Greek foreign debts (with the difference split between remaining Euro member taxpayers and those holding Greek bonds taking losses) in exchange for Greece leaving the Euro, allowing adjustment to take place through devaluation of the Greek currency. Kyiv School of Economics, 6 October 2011