May 16, 2011
Chatham is pleased to announce the following additions to the course catalog for students in the international multinational supranational global macroeconomic graduate program. Students may select any one of the following electives to satisfy their euro zone crisis concentration requirements. Please consult the course catalog for full descriptions.
A Tale of Two Euros: This course will explore the rich history of the European Economic and Monetary Union dating all the way back to 1992, and the subsequent emergence of a single currency in 1999. The euro is stretched and pulled like a too small-blanket on one really big bed where 17 member nations and a further 6 non-members are trying to all get some rest after another day of economic infighting. Germany, with a euro zone low 6.7% unemployment rate, needs the ECB to clamp down on inflation and ratchet up rates to cool its overheating economy. On the other side of the bed lies Spain, Ireland, Greece, and Portugal, all with double-digit unemployment rates, in need of more ECB accommodation as they struggle with economic stagnation. In the middle of this bed lies Jean-Claude Trichet, who is trying to make sure every member nation is covered, and finding that no one is really comfortable with the arrangement. Students who take this course will come away wondering how all this is going to work out given that a single currency can’t possibly represent the economic interests of each nation without extreme cooperation and compromise.
Sovereign Defaults – Domino Theory: Students who take this class will build an elaborate domino course with Greece at one end and their hopes, dreams, and aspirations at the other end. Watch as a default of Greek debt triggers defaults of national Greek banks, followed by other European banks, followed by sovereign defaults of Spain, Italy, Portugal, and Ireland, which then jumps overseas to Asia and the Americas and continues the astonishing course until it reaches your doorstep! Students will also learn how the European Financial Stabilization Mechanism (EFSM) can stop the dominos from falling by issuing bonds on behalf of the entire European Monetary Union and then lending to the member state who cannot otherwise access global capital markets and would likely default on its debt without said loan. A European Financial Stability Facility (EFSF) is also in place to back the EFSM as guarantor, with funds that would be contributed by all member states including, ironically, the distressed nations. Students who take this class should not be surprised if their dominos change course and take down seemingly healthy sovereigns and financial institutions that no one currently suspects as vulnerable.
Stressed, Messed, Not quite the Best, put your Bank to the Test: Students will examine the capital levels of more than 100 European financial institutions against a “baseline” and “adverse” scenario. In the baseline scenario, all direct and indirect sovereign exposures will be subject to increases in long term and short term interest rates, to assess the bank’s ability to withstand general changes. The adverse scenario will capture country-specific shocks to real estate prices, interest rates, equity markets, and sovereign debt prices. An assessment of each bank will also be made to consider their preparedness to adopt any new capital rules contemplated for the period in question, but this is not an attempt to accelerate the Basel III implementation. Students will be encouraged to ask lots of questions, like, for example, why is it that some banks that passed the previous round of stress tests needed bailouts only months later, and what exactly will be considered “capital” for this examination given that it was left undefined in both the last round and the current round of testing. Students, investors, and the general public should come away feeling good about the stability of the largest financial institutions in Europe, unless of course we experience real world conditions worse than the adverse scenario, which happened after the last round of testing as well.
Chatham is committed to furthering your academic studies and would welcome any suggestions for future courses. And if you have any questions about your interest rate, currency, or commodity risks, we can help you with that too. Give us a call!