“Financial Risk and Crisis Management after
the Global Financial Crisis” Series No.1 (10/2015)

The Global Financial Crisis andManagement of the Eurozone Crisis1
Eiji Ogawa iProfessor, Graduate School of Commerce and Management,
Hitotsubashi University
Councilor, The Japan Economic Research InstituteThis document is an English translation of the original Japanese, which appears in
the Oct. 2015 edition of The Japan Economic Research Institute Monthly Report,
published by The Japan Economic Research Institute.
11

1. Introduction
Although the global financial crisis began with the meltdown of the US
subprime mortgage market, defaults on collateralized subprime mortgage
securities held in the investment portfolios of European financial
institutions significantly influenced not only credit risk in the securities andlending markets but also counterparty risk in the interbank markets fromwhich financial institutions use to procure short-term funding. The
manifestation of this new financial risk following the global financial crisis
has heightened the need for financial risk management both before and after
a crisis. To address these needs, individual institutions (financial institutions
as well as corporations) are developing financial risk and crisis management
plans while governmental and international bodies are exploring financial
regulations and regional financial cooperation with regard to cross-borderfinancial transactions.
The US subprime mortgage problem also significantly impacted theEuropean financial institutions that played the role of international
financial intermediaries between balance-of-payments surplus nations, suchas oil exporters, and balance-of-payments deficit nations, such as the US,
during the time of global payment imbalances (Ogawa, 2013b).
Simultaneously, as the global recession deepened and nations ran larger
fiscal deficits, Greece fell into a fiscal crisis that subsequently spread to someother Eurozone nations (Ogawa, 2015). To cope with this Eurozone crisis, theEuropean Commission (EC), the European Central Bank (ECB), and theInternational Monetary Fund (IMF) established a Troika to offer financial
assistance.
This paper first reviews the phenomenon of US dollar liquidity shortages
and ensuing policy responses during the global financial crisis andsubsequently considers optimal ways to manage a financial crisis stemmingfrom the dollar liquidity shortages. Furthermore, it reviews the government
policies used to combat the Eurozone crisis and considers best practices tomanage financial risk pertaining to the IMF and financial cooperation in theregion.

2. US Dollar liquidity shortages during the Global Financial
Crisis2

2.1 The Global Financial Crisis and European Financial Institutions
The global financial crisis of 2007–2008 originated in the US wherein thecollapse of a housing price bubble led to defaults of subprime mortgages. The
housing price bubble began when home prices rose due to home purchasesthat were based on the expectation that prices would rise. When those
expectations reversed from housing price increases to declines, homes
flooded the market, and housing prices stopped increasing and instead began
to decline. This sort of self-fulfilling expectation both expanded the bubble
and collapsed it.
In this US housing price bubble fed by self-fulfilling expectations,
expectations for rising home prices led to mortgages being issued to
low-income households who would normally find it difficult to secure suchloans due to their extremely high credit risk. Simultaneously, US investmentbanks were at the forefront in designing securitized products (RMBS, etc.)
backed by subprime mortgages, which shifted that credit risk to otherparties. They then combined credit default swap (CDS) backed by thoseinitial securitizations and sold them off to financial institutions in the US
and Europe.
European financial institutions’ investment into these securitizations
served to help savings-starved US economy procure funds. This flow offunding into the US came not only from Europe but also from the Middle
East, Russia, and other oil-exporting creditor nations that invested in thesesecuritizations through intermediaries, i.e., European financial institutions.
In this sense, European financial institutions assumed the role ofinternational financial intermediaries between the oil-exporting creditor
nations and the US, with its negative balance of payments. These
international financial transactions were entered into not only by the UKwith London as a center of international finance but also by Iceland andother nations. Moreover, these international transactions caused capital toflow from these creditor nations into Europe, fueling purchases of land andother assets in Europe and adding to the land bubble (Ogawa, 2013a).
However, once the housing bubble burst in the US, declining prices, thesubprime mortgages’ high credit risk, once concealed by the expectation ofrising home prices, was exposed. As the housing bubble burst, subprime
mortgages defaulted, and the securitizations backed by subprime mortgages
became more likely to be uncollectible. This had the same degree of impact
3

on the European financial institutions that held many of these subprime
mortgage securitizations as it had on the US financial institutions.
Thus, European financial institutions directly felt the impact of the US
subprime meltdown; coupled with the effects of the bursting of their own
land bubble, their own balance sheets were damaged. Moreover, European
financial institutions also faced counterparty risk due to lack of clarity
regarding the degree of subprime mortgage-backed products in their overall
holdings of securitizations.
2.2

US Dollar liquidity shortages in Europe

As mentioned before, European financial institutions’ balance sheets weredamaged as a direct result of the subprime crisis. Simultaneously, a land
bubble burst in some EU nations, leading mortgages issued by the European
financial institutions themselves to default. Further exacerbating andcomplicating the problem was the lack of clarity regarding the degree ofsubprime mortgage-backed products in general securitizations, making it
impossible for the financial institutions involved to determine the extent towhich their balance sheets were damaged. Consequently, financial
institutions began to regard their trading counterparties with mistrust, andconsequently counterparty risk increased.
Although the ECB, Bank of England (BOE), and other European countries’
central banks can normally supply the market with Euros and British
pounds, they cannot supply US dollars without being subject to foreignexchange reserve restrictions. The ECB and BOE cannot provide anunlimited supply of US dollar funding as a “lender of last resort.” Europe’s
financial institutions therefore faced serious counterparty risk in obtaining
dollar-denominated liquidity. In the period immediately following thebankruptcy of Lehman Brothers, financial institutions found it difficult toraise dollar-denominated funding in London and other European interbank
lending markets.
Counterparty risk among European financial institutions was clearly
manifested in the London Interbank Offered Rate (LIBOR). Figure 1
illustrates the movement of LIBOR (three month, US dollar denominated)minus the equivalent US Treasury Bill (TB) rate, indicating the degree towhich financial institutions’ credit risk incurred an additional risk premium(credit spread) vis-a-vis TBs—a risk-free asset. The risk premium for the4European financial institutions that comprise the primary users of the
London interbank lending market is visible from the movement of the credit
spread.
Figure 1. LIBOR (US$, 3 mo.) and Credit Spreads (LIBOR－TB rate, US$, 3 mo.)
LIBOR (US$, 3ms)と信用スプレッド（LIBOR-TB, US$, 3ms）％
7

Credit Spreads (LIBOR[3mo.] – TB[US$, 3mo.])

信用スプレッド（LIBOR(US$,3ms)-TB(US$,3ms)）
LIBOR(US$, 3ms)

6

5

4

3

2

1

2007/1/1
2007/1/18
2007/2/6
2007/2/23
2007/3/14
2007/4/2
2007/4/19
2007/5/8
2007/5/25
2007/6/13
2007/7/2
2007/7/19
2007/8/7
2007/8/24
2007/9/12
2007/10/1
2007/10/18
2007/11/6
2007/11/23
2007/12/12
2007/12/31
2008/1/17
2008/2/5
2008/2/22
2008/3/12
2008/3/31
2008/4/17
2008/5/6
2008/5/23
2008/6/11
2008/6/30
2008/7/17
2008/8/5
2008/8/22
2008/9/10
2008/9/29
2008/10/16
2008/11/4
2008/11/21
2008/12/10
2008/12/29
2009/1/15
2009/2/3
2009/2/20
2009/3/11
2009/3/30
2009/4/16
2009/5/5
2009/5/22
2009/6/10
2009/6/29
2009/7/16
2009/8/4
2009/8/21
2009/9/9
2009/9/28
2009/10/15
2009/11/3
2009/11/20
2009/12/9
2009/12/28

0Datastream
Data: Datastream

Data：Datastream

As illustrated in Figure 1, the credit spread was less than 0.5% before thesummer of 2007, when the subprime mortgage crisis emerged, but the credit
spread rose above 1% by August, increasing above 2% by month end. With
the Lehman bankruptcy on September 15, 2008, the credit spread rose again,increasing to 2% on the following day and skyrocketing to 4.5% by the middleof October 2008. The LIBOR level also rose from 2.8% before the Lehman
bankruptcy to nearly 4.8% by mid-October, an increase of 2% in one month.
Figure 2 indicates that the Euro peaked vis-a-vis the US dollar and theJapanese yen before the global financial crisis, but it dramatically declined
against both currencies during the crisis. Furthermore, it indicates that thisdramatic decline in the Euro was greater than that experienced during thesubsequent Eurozone crisis.
This major increase in the dollar-denominated LIBOR credit spreadindicates that European financial institutions were subject to an extremely
high risk premium when attempting to raise dollar-denominated funds in
5

Figure 2: Movement in the EUR vs. JPY and USD

USD/JPY

EUR/JPY

USD/JPY
EUR/JPY

Data：Datastream

London’s interbank market. Notably, this risk premium was imposed on
financial institutions that had not suffered much damage to their balance
sheets. Those institutions that were deemed likely to have damaged balance
sheets were unable to procure dollar funding in the interbank market. The
increase in counterparty risk thus made it difficult for European financial
institutions to procure dollar funding; thus, dollar liquidity suffered.
2.3 The European Response to Dollar liquidity shortages
The Federal Reserve Board (FRB) initiated quantitative easing by
reducing the federal funds rate (a policy interest rate) to zero percent toeliminate US dollar liquidity shortages. As presented in Table 1, it also
successively entered into currency swap agreements with central banks ofnumerous major foreign countries, thereby providing an unlimited supply of
US dollars. Central banks, including the European Central Bank (ECB), also
provided unlimited liquidity to European financial institutions based on the
US dollar liquidity supplied by FRB swap lines.
Considering the shortage of dollar funds in the euro area and surrounding
6

Table 1. Initiation and Expansion of Dollar Supply Operations
12 Dec 2007

The US Federal Reserve Bank enters into new currency swap agreements with
the European Central Bank (ECB) and Swiss National Bank (SNB). Other
central banks implement dollar supply operations using currency swap
agreements as funding sources.

11 Mar 2008

FRB expands currency swap agreements with ECB and SNB.

2 May 2008

FRB expands currency swap agreements with ECB and SNB. Other central
banks expand dollar supply operations using currency swap agreements asfunding sources.

30 Jul 2008

FRB expands currency swap agreement with ECB. ECB and SNB expand dollar
supply operations using currency swap agreements as funding sources.

18 Sept 2008

FRB expands currency swap agreements with ECB and SNB and enters into
new currency swap agreements with the Bank of Japan (BOJ), Bank of England(BOE), and Bank of Canada. Other central banks initiate or expand dollar
supply operations using currency swap agreements as funding sources.

24 Sept 2008

FRB enters into currency swap agreements with the Reserve Bank of Australia,
Sveriges Riksbank, Danmarks Nationalbank, and Norges Bank.

26 Sept 2008

FRB expands currency swap agreements with ECB and SNB. ECB, SNB, andBOE expand dollar supply operations using currency swap agreements asfunding sources.

29 Sept 2008

FRB greatly expands currency swap agreements with various central banks,
extends term of currency swap agreements from the end of Jan 2009 to the endof Apr 2009.

13 Oct 2008

ECB, SNB, and BOE initiate unlimited dollar supply operations as long as thecurrency swaps are fully collateralized and have fixed interest rates. FRB
follows by abolishing the currency swap agreement limit with these central
banks. BOJ announces it is considering initiating similar measures.

14 Oct 2008

BOJ implements unlimited dollar supply operations as long as the currency
swaps are fully collateralized and have fixed interest rates. FRB follows byabolishing the limit on its swap agreement with the BOJ.

28 Oct 2008

FRB enters into a new currency swap agreement with the Reserve Bank of New
Zealand.

29 Oct 2008

FRB enters into new currency swap agreements with the Banco do Brasil,
Banco de Mexico, Bank of Korea, and the Monetary Authority of Singapore.

Source：Bank of Japan7

countries, it became apparent that providing dollar funds to the European
interbank market by only utilizing the foreign currency reserves held by the
ECB and other central banks would be inadequate to overcome this shortage.
Therefore, the FRB entered into central bank liquidity swaps with the ECB
and Swiss National Bank on December 12, 2007, supplying dollars to theseparties. Following the Lehman bankruptcy, the Federal Reserve (FRB)
entered into a currency swap agreement with the BOE on September 18,
2008. This was followed on September 24 by similar agreements with theSwedish, Danish, and Norwegian central banks. On October 13, the FRB
removed the value limitation on its swap agreements with the ECB, Swiss
National Bank, and BOE, initiating unlimited secured dollar-supply
operations. On October 14, the Bank of Japan also announced that it would
conduct similar operations in the Tokyo market in preparation for the
potential inability of Japanese banks to raise dollar funds in European
interbank markets. This dollar liquidity supply system found its footing in
mid-October 2008, rapidly shrinking the credit spread from 4.5% to below 2%
by November 2008, with the said spread declining below 1% by January 2009.
By June 2009, the credit spread declined below 0.5%, returning to pre-global
financial crisis levels. However, a troublesome pattern continued in theinterbank markets wherein commercial financial institutions were allborrowers and the central banks were the sole lenders.
Considering this, it became clear that the ECB and European countries’
central banks could not handle the supply of dollar liquidity to the European
interbank markets during the time of heightened counterparty risk. They
were only able to lower interest rates for European currencies, which limited
the provision of dollar funding to the European financial institutions thatneeded it. Furthermore, it clarified that the IMF, which provides monetary
support to help mitigate balance-of-payments crises, was also unable tofunction as a “lender of last resort” in providing unlimited dollar funds. In
the end, the European financial market was forced to depend on the US
domestic “lender of last resort” for the dollar—the FRB.
The situation of dollar liquidity shortages in Europe during the global
financial crisis indicated that the dollar still serves as a crucial function in
the Eurozone and the EU, where the euro is the single and common currency.
Particularly, it became apparent that dollar liquidity is crucial to financialtransactions and that the dollar remains the basic currency as it was under8the Bretton Woods system. On the other hand, the FRB’s currency swap
agreements that resolved the credit spread issue that arose from dollar
illiquidity in Europe revealed that the FRB was the only “lender of lastresort” for dollar liquidity. Moreover, although this revealed a deficiency inthe market whereby central banks were the only lenders, the elimination of
the credit spread through currency swaps with the FRB and an influx ofunlimited dollar liquidity from Europe’s central banks suggested that thedrying up of dollar liquidity was an outcome of increasing counterparty risk
at European financial institutions. Although the potential for insolvency
from bad debt at these European financial institutions was not apparent
during the time, the ECB’s (2014) stress test results and subsequent trends
should be examined.

3. Responses to the Eurozone Crisis
3.1 The Three-Part Policy for Combating the European Debt Crisis
The dollar liquidity shortages caused by the global financial crisis appeared
to have been resolved by mid-2009 as credit spreads were reduced by theunlimited supply of dollar liquidity from European central banks and theircurrency swap agreements with the FRB. However, the injection of capital
into ailing financial institutions and international fiscal stimulus policy
coordination by the G20 to combat the global recession following the global
financial crisis worsened fiscal budgets in many nations. Then, the discovery
in October 2009, when Greece’s administration turned over, that the nation
had falsified its budget figures triggered a crisis of confidence in Greece’s
financial authorities. In particular, rolling over Greek government debt
became difficult. Furthermore, since banks in France, Germany, and othercountries also held Greek government debt, the potential for aninternational balance-of-payments crisis in the capital account emerged.
Therefore, the European Commission (EC), ECB, and IMF jointly
established a Troika to combat the Greek fiscal crisis.
The following three items are generally required to resolve a fiscal crisis(Ogawa, 2013a).
The first essential factor is to restore fiscal discipline, the erosion of which
played a major role in causing the Greek fiscal crisis and ripple effects insome other Eurozone nations. Restoring and strengthening fiscal discipline9

is imperative. To achieve this, the country suffering from the fiscal crisis
must undergo fiscal reform—a process that requires visible planning andsteady implementation. It is also necessary to reduce sovereign risk as wellas the potential for a fiscal crisis by establishing strict fiscal discipline andpreventing moral hazard.
The second prerequisite is to extinguish some of the massive government
debt through private sector involvement to facilitate crisis management.
Extinguishing debt of the country in fiscal crisis (Greece) is necessary tosoften the burden borne by that nation’s economy during fiscal
reconstruction. Debt relief thus provides the afflicted nation’s government
with an incentive to advance with austerity measures for its rehabilitation.
Considering the essential role of private financial institutions as lenders in a
debt crisis, both lenders and borrowers must share a portion of the burden toprevent moral hazard.
The third factor is the need to provide a safety net for the private sector
financial institutions participating in debt relief. To minimize the impact ofdebt relief from the fiscal crisis on private sector financial institutions andlimit the secondary impact on other Eurozone nations, the European
Stability Mechanism (ESM, the successor to the European Financial
Stability Facility [EFSF2] that was formed as an interim organization before
the Treaty of Lisbon revision) was established in October 2012 to act as asafety net (European Commission, 2011). In its capacity as a safety net, theESM was expected to purchase the sovereign debt of countries facing a fiscal
crisis.
Before its revision, the Lisbon Treaty prohibited financial assistance tomember states. The EFSF was established insofar as the treaty’s Article
122.2 broadly interprets financial crises as being in the same category as
natural disasters, that is, as “exceptional occurrences beyond its control.”After the Lisbon Treaty was revised, the EFSF became a permanent entity
as the ESM, and financial transfers among Eurozone nations during crises
became possible. These financial transfers are extremely limited, but they
could potentially integrate fiscal sovereignty.

The EFSF was created as a temporary entity because of the need to revise the Lisbon Treaty, which prohibitedfiscal transfers except in the event of a natural disaster. From this, came the establishment of the ESM, which isintended to guard against the contagion of fiscal crises, or more precisely, “exceptional occurrences beyond its
control,” in the same class as natural disasters, as defined by Article 122.2 of the Lisbon Treaty.
2

10

3.2 Actions to Combat the Greek Fiscal Crisis
When the Eurozone nations in crisis (Greece, Ireland, Portugal, andCyprus) requested the IMF’s financial assistance, experience with EC and
IMF joint programs in central and eastern Europe proved to be useful. The
ECB was added to the mix as a third partner, and the three constituted a
Troika for providing monetary assistance in cooperation with one another.
The measures to the Greek crisis, which triggered the Eurozone crisis, isworth noting. Under the Troika system, the first line of financial support for
the Greek fiscal crisis was to be a bailout facility granted by the Eurozone
nations and the IMF (worth EUR 110Bn, of which 80Bn was from Eurozone
nations and 30Bn from the IMF), as decided in May 2010. Here, under the
Troika, the European nations shouldered two-thirds of the monetary burdenof rescuing Greece while the IMF provided the remaining one-third.
Therefore, although the IMF typically plays a key role in crisis management,
it was a minority lender in its financial support for Greece. Therefore, theIMF found it difficult to manage the Troika.
Since the initial stages of the Greek financial rescue program, the following
three points have stood out: (i) restoring fiscal sustainability, (ii) improving
external competitiveness, and (iii) creating safeguards for financial sector
stability. The first bolstered confidence and restored market access such thatthe ratio of public debt outstanding to GDP has been declining since 2013.
The second comprised shifting Greece’s economy to an investment- andexport-driven growth model through structural reforms such as lowering
nominal wages, cutting costs, and boosting price competitiveness. Moreover,it improved the government’s economic transparency and reduced thegovernment’s role in the economy. The third established a financial
stabilization fund to guard against deflation and expand the safety net for
managing bank solvency issues. It also expanded the government’s existingbank liquidity assistance facility to mitigate liquidity issues resulting fromincreasing sovereign risk. These constituted the conditions for financial
support from the IMF or the IMF’s conditionality. Eurozone nations, working
in tandem with the IMF to provide such support, imposed this conditionality
on the Greek government.
The second line of financial support was to be a new loan facility totaling
EUR 130Bn (EUR 102Bn from Eurozone nations, EUR 28Bn from the IMF),
to be granted in March 2012. This was to reduce the amount of Greek
11

sovereign debt in the private sector, which was not done by the first bailout
facility. Since neither the EFSF nor the ESM existed when the first facility
was provided, there had been no private sector participation in Greeksovereign debt relief. The first line of support, therefore, had merely imposeda major burden on the Greek government and made no progress in actuallyresolving the Greek fiscal crisis. Therefore, debt relief with private sector
participation was discussed, and private sector debtholders agreed to take a
53.5% write down. Avoiding a unilateral “disorderly default,” the agreement
instead resulted in an “orderly default” with the private sector.
However, the hard-line left-wing Syriza party, led by Alexis Tsipras, won alandslide victory in the January 25, 2015, general election on a platform of
opposing austerity measures, and Greece’s internal political upheaval
continued as the new government put its anti-austerity commitment to anational referendum as the June 2015 repayment to the IMF approached.
This delayed the repayment to the IMF, and the government won theanti-austerity referendum on July 5, 2015. However, Prime Minister Tsipras
later changed his position toward austerity, and the Greek parliament
passed a fiscal reform bill on July 16, 2015.
Tsipras’s abandonment of his anti-austerity pledge in favor of austerity
measures allowed Greece to receive a third bailout package. However, adeepening distrust of Greek domestic politics in other Eurozone nations,especially in Germany, delayed discussions of debt relief. Opinions on debt
reduction were split between those arguing that it would provide a positive
incentive for fiscal reform and debt balance sustainability and those arguingthat it would negatively impact fiscal discipline and increase moral hazard.
3.3 Measures Restoring Trust in the Financial Authorities
If we consider that a loss of confidence in Greece’s financial authorities
triggered a shift in the equilibrium by which one incident (the bubble) set off
another (the post-bubble sovereign crisis), restoring trust in the financial
authorities is necessary to resolve the sovereign crisis and escape this
scenario. This requires the fixing of the fiscal deficit as well as maintenanceof fiscal discipline by the government.
At the December 2011 EU summit, all parties, except the UK and the Czech
Republic, fundamentally agreed on a fiscal compact to strengthen fiscal
discipline by forming a “Fiscal Stability Union” that would end the sovereign
12

crises in Greece and other Eurozone countries (European Council, 2011).
Although this aimed to strengthen the EU’s economic alliance, for the time
being, it was merely a “Fiscal Stability Union” and not a “Fiscal Union” thatwould consolidate financial sovereignty. In addition, this accord sought tolegislate fiscal rules that would apply under each nation’s constitution orequivalent legal construct to limit each nation’s structural deficit to 0.5% of
its GDP, except in cases of deficits resulting from changes in the businesscycle. Furthermore, a self-correcting mechanism to apply excessive deficit
procedures would be established automatically once a nation’s deficit was
confirmed by the EC as exceeding that limit, providing that there was no
opposition from the EU members.
The Eurozone nations fundamentally agreed on creating such a fiscal
compact with new rules to strengthen fiscal discipline in this way. These
fiscal rules decreed that government’s overall budgets must balance.
However, this was not the convergence criterion specified by the Maastricht
Treaty wherein the ratio of a government’s annual deficit to GDP must notexceed 3%; instead, it limited structural deficits to 0.5% of GDP, excluding
cyclical factors, to consider the damage to fiscal revenue and expenses
caused by economic downturns and the resultant shrinkage of tax revenue
and increased unemployment benefits. The condition that these rules belegislated as part of each nation’s constitution or equivalent legal construct
was also included.
In the EU, the “Stability and Growth Pact” was already established toensure fiscal discipline. In emphasizing fiscal discipline, the EU demanded
via the “Stability and Growth Pact” that each nation practice fiscal disciplineby implementing a sound fiscal management even after adopting the Euro as
its unit of currency. The European Commission and Council of Ministers
mandate that Eurozone nations institute “stability programs” as a method
for mutually monitoring each other’s fiscal status. Based on these “stability
programs,” the European Commission and Council of Ministers caninvestigate each nation’s fiscal status and apply excessive deficit procedures
if a nation is deemed to be running too large a deficit.
These procedures include recommending corrective actions to thosecountries found to be running excess deficits by the European Commission
and the Council of Ministers. If a nation does not comply with theserecommendations, then sanctions amounting to 0.2%–0.5% of GDP will be
13

applied if the country’s deficit exceeds 3% of GDP. This would initially takethe form of a zero-interest deposit, but more than two years of excessive
deficits without correction would result in the deposit being confiscated as afine. These punitive and strict rules were therefore created in quest for fiscal
discipline among member nations. Due to the discretionary nature of theserules, they were not actually applied in some cases wherein they should havebeen applied. Consequently, the Greek government triggered moral hazard
because they assumed that these procedures would not be applied to them
due to such discretion. Greece came to be consistently incapable of complying
with the GDP rule of 3% for its fiscal deficit.
Although these procedures could actually have been applied to numerous
nations, including Greece, the discretionary leeway that existed resulted insuch actions not being taken even once. Because of this track record ofinaction, the EU agreed on new rules for establishing a self-regulating
mechanism that, barring any opposition by the Eurozone nations,
automatically triggers excess deficit procedures when the EC determinesthat a country’s deficit has exceeded a given limit. They therefore sought apractical strengthening of fiscal discipline. This “Fiscal Stability Union” ismerely a basic agreement on a policy accord among Eurozone nations tostrengthen fiscal responsibility and promote fiscal reform. In other words,
this agreement stops short of being a “Fiscal Union” in the sense of aconsolidation of fiscal authority.

4. Conclusion
The response to the global financial crisis and the Eurozone crisis holdseveral lessons that may be applied to Asia.
First, as a general theory, crisis management plans should be set up aheadof time during a period of economic stability. However, discussions andconclusions about establishing crisis management plans may not occur until
an actual crisis has flared up. Considering this, establishing a crisis
management plan during the crisis itself may delay a response and allow thecrisis-ridden country’s problems to deepen. In addition, those problems will
have a greater chance of spreading to other nations. A classic example is theTreaty of Lisbon’s restriction on financial transfers, which prevented theEurozone from establishing the ESM until after the Eurozone crisis. This14

also happened in East Asia with the 1997 Asian currency crisis as regional
financial cooperation was nonexistent and discussions to set up the AsianMonetary Fund (AMF) had not yet come to fruition. East Asia had to wait
until 2000 before the first financial crisis management system, the Chiang
Mai Initiative, was finally established as a regional financial cooperation
program.
The second lesson from the global financial crisis is that the FRB’s provisionof dollar liquidity at a time of insufficient liquidity or a liquidity crisis was atleast able to rapidly shrink credit spreads. In such a situation, the FRB wasable to respond to the crisis because it was in the US, the epicenter of thecrisis, simultaneously experiencing liquidity problems. If the US economy
had been under inflationary pressure and the FRB had sought to tightenmonetary policy, then it is not entirely certain that the FRB would have had
the same type of policy response toward other countries. Preparing for such a
scenario would need to be complemented by actions from the IMF andregional financial cooperation programs. In East Asia, to make this type of
response possible, the ASEAN+3 entered into a currency swap agreement
under the Chiang Mai Initiative. In addition, bilateral agreements wereexpanded into multilateral agreements to improve their maneuverability.
The ASEAN+3 Macroeconomic Research Office (AMRO) has also been set up
as an oversight body for both crisis management and crisis prevention.
The third lesson is found in the Eurozone crisis management handled by
the EC, ECB, and IMF’s Troika system. In this, the IMF partnered with
regional financial cooperation efforts to work on crisis management. A
balance-of-payments crisis or a currency crisis would normally be managed
by the IMF alone. However, although the Asian currency crisis was also
handled mainly by the IMF, most of the actual monetary support provided
during the crisis was contributed by the East Asian countries. In the Chiang
Mai Initiative’s currency swap agreement, the IMF link is weakened because
the swaps would be executed only after the IMF support was received topromote maneuverability. While the swap agreement bills itself ascomplementary to the IMF, it is also viewed as partially distancing itself
from the IMF.

15

References[1] ECB（2014）Aggregate Report on the Comprehensive Assessment, October
2014.
[2] European Council（2011）Statement by the Euro Area Heads of State or

Government, Brussels, 9 December 2011.
[3] IMF（2015）“Preliminary Public Debt Sustainability Analysis,” IMF

Country Report, June 26,2015.
[4] Ogawa, Eiji, (2013a) “Kinyu kiki to oushu keizai” (Financial crisis and theEuropean economy), in Sakuragawa, Masaya and Fukuda, Shinichi, eds.

Naze kinyu kiki wa okoru no ka: kinyuu keizai kenkyuu no furontia(Why do financial crises occur?: The monetary economics research
frontier), Toyo Keizai Inc., 2013, 223-251.
[5] Ogawa, Eiji, ed. (2013b) Gurobaru inbaransu to kokusai tsuka taisei(Global Imbalances and International Monetary System), Toyo Keizai
Inc., 2013[6] Ogawa, Eiji, ed. (2015) Yuuro-ken kiki to sekai keizai: shinnin kaifuku notame no housaku to Ajia he no eikyou (The Euro Zone Crisis and theWorld Economy: Measures to recover credibility and their effect on Asia),
University of Tokyo Press, 2015.

16

Profile of Mr. Eiji Ogawa, D.Com
Born in 1957, Hokkaido, Japan.
B.A.(Commerce) and Ph.D. (Commerce) from Hitotsubashi University.
Lecturer, Associate Professor, and Professor, Graduate School of Commerceand Management, Hitotsubashi University (April 1999–present).
Visiting Scholar, Harvard University Department of Economics (1986–1988),
University of California, Berkeley, Department of Economics (1992),
International Monetary Fund Research Office (September 2000).
i

Specialty: International Finance
Major Publications:

Kokusai tsuka shisutemu no anteisei (The stability of the internationalmonetary system), Toyo Keizai Inc., 1998.

Chugoku no taitou to higashi Ajia no kinyu shijou (The rise of China andEast Asia’s financial markets) (jointly edited with the Ministry of Finance,
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