Description
Timeline of events, How the crisis began? Where it went wrong, Financial Contagion, Main Reasons, Impact on Indian Economy
Tejal Phatak Harsh Dhruva Nirvisha Bhuta
Flow of presentation
?
What is Eurozone?
?
? ? ? ? ?
Timeline of events
How the crisis began? Where it went wrong Financial Contagion Main Reasons Impact on Indian Economy
What is Euro Zone?
? ?
In 1958, an organization called European Coal and Steel Community was formed This evolved into the European Union (EU) which was established by the Maastricht
Treaty
?
Under the Treaty the EU members should limit deficit to 3% of GDP and debt to 60% of GDP
?
Euro became a reality on Jan 1, 1998 , but came for the European consumers on Jan 1 2002
?
It currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain
Timeline of Events
?
In December 2009, Greece admits that its debts have reached 300bn euros and has a debt amounting to 113% of GDP - nearly double the eurozone limit of 60% Fitch, the ratings agency, cuts Greek debt to BBB+, from A-, the first time in a decade the country is rated below investment grade In 2010 The EU announces that the Greek deficit is of 13.7% of GDP more than 4 times the maximum allowed by EU rules In May 2010 the IMF approved a €30bn 3 year loan for Greece as part of a joint EU and IMF €110bn financing package The euro continues to fall and other EU member state debt starts to come under scrutiny, starting with the Republic of Ireland. In November, the EU and IMF agree to a bailout package to the Irish Republic totalling 85bn euros.
?
?
?
?
?
Timeline of Events
?
In February 2011, eurozone finance ministers set up a permanent bailout fund, called the European Stability Mechanism, worth about 500bn euros
?
In April 2011, Portugal asks the EU for help
In May, the eurozone and the IMF approve a 78bn-euro bailout for Portugal In June, eurozone ministers ask Greece to impose new austerity measures before it gets the next tranche of its loan, without which the country would default on its enormous debts The yields on government bonds from Spain and Italy rise sharp as investors demand huge returns to borrow In August , the European Central Bank says it will buy Italian and Spanish Government bonds to try to bring down their borrowing costs, as concern grows that the debt crisis may spread to the larger economies of Italy and Spain
?
?
?
?
Timeline of Events
?
During September 2011 Spain passes a constitutional amendment to add in a "golden rule," keeping future budget deficits to a strict limit Italy passes a 50bn-euro austerity budget to balance the budget by 2013 after weeks of haggling in parliament. There is fierce public opposition to the measures - and several key measures were watered down
?
?
In January Weeks of negotiations ensue between Greece, private lenders and the "troika" of the European Commission, the European Central Bank and the IMF, as Greece tries to get a debt write-off and make even more spending cuts to get its second bailout In February2012 , Greece passes the unpopular austerity bill in the parliament
?
Timeline of Events
?
S&P downgraded France from AAA to AA+ and 8 other eurozone countries
blaming the failure of Euro zone leaders to deal with the crisis
?
Euro zone service sector shrinks unemployment rates hit an all time high, The European Commission predicts that the Eurozone economy will contract by 0.3% in 2012
?
In April 2012, Italian and Spanish borrowing costs increase in a sign of
fresh concerns among investors about the country's ability to reduce its high
levels of debt as they struggle to avoid going the Greek way
How the crisis began?
? ?
Continuous breach of the Maastricht Treaty PIIGS countries had to borrow money at interest rates much higher than the rates at which Germany borrowed
?
After entering the EU they could borrow money at interest rates close to that of Germanyeconomically best managed country in the EU
?
Rest of Europe used Germany's credit rating to borrow as cheaply as Germans could to buy stuff they couldn't afford
?
Inflation in the PIIGS countries was higher than the rate of interest i.e. if the borrowing
rate is 3 per cent the inflation is 4 per cent
? ?
This led to huge amount of debt for Greece which touched 160% of its GDP Government also started to borrow at cheaper rates and paid higher wages to please its
constituency
?
A job which pays 55,000 euros in Germany paid 70,000 euros in Greece even with the fact that Germany is a more productive nation
SPAIN
? ?
Spain had the biggest housing bubble in the world It had as many unsold homes as the United States, even though the US is six times bigger
? ?
Most of these new homes were financed with capital from abroad Spain's real estate debt comes to around 50 per cent of its GDP
AUSTRIA
? ?
In 2004, interest rates in Hungary were at 12.5 per cent
In neighbouring Austria it was 2 per cent and in Switzerland even lower at around 0.5 percent
?
So the Austrian banks, many of which also had branches in Hungary, began to lend to
Hungarian borrowers
? ?
Austrian banks lent 140% of their GDP to countries like Hungary Even though Hungary has put in austerity measures and is trying to repay, if there is a blow up, the Austrian government wouldn't be able to save the banks and ECB might
have to step in
Where it went wrong?
? ?
Private sector borrowing increased rapidly due to cheaper interest rates
Germany 164%, France 224%, Italy 181%, Spain 283% - Private debt as a
percentage of total economic output (non-financial sectors)
? ?
All the debt helped finance more and more imports by Spain, Italy and even France Meanwhile, Germany became an export selling far more to the rest of the than it was
buying as imports
?
Germany was earning a lot of surplus cash on its exports and most of that cash ended up being lent to southern Europe
?
Germany kept its wages constant while Italy and Spain increased wages leading to
price disadvantage and competitive exports
Financial Contagion
?
Germany, France, Britain, USA which are secured economies have lent heavily to PIIGS nations
?
When an ailing country becomes over leveraged and is unable to handle its debt, banks and other financial firms that have lent it money could be exposed to major losses
?
This could unsettle the home country of the banks or even spread the troubles to a third country
?
That can occur, for instance, because banks may try to cover their losses in one country by borrowing loans from another
?
For instance, the German government gives money to the EFSF so that it can give money to the Irish government so that the Irish government can give money to Irish banks so the Irish banks can repay their loans to the German banks
?
In case of Greece, a lot of German and French banks which have lent money will be in trouble if Greece defaults
Main Reasons
?
Eurozone is an economic and monetary union and not a fiscal or a political union
?
Lack of Common (minimum) discipline for budgetary policy binding all EU member states
?
Lack of macroeconomic coordination
?
Lack of supervision in the levels of private debt and asset bubbles
?
Lack of a pan-European debt market (Eurobonds)
Possible Solutions
Cut Spending
?
Will deepen the recession and fuel unemployment (already over 20% in Spain) which may push wages down to more competitive levels
?
Lower wages will make people's debts even harder to repay, will cut their spending even more, or stop repaying their debts
?
And lower wages may not even lead to a quick rise in exports, if all of the European export markets are in recession too
?
Will lead to more strikes and protests and more nervousness in financial markets
Don’t Cut Spending
?
?
Risk of a financial collapse
The amount borrowed has burgeoned since 2008 due to economic stagnation and high unemployment
?
Markets will lose confidence and may fear economy is simply too weak to support its
increasing debt load
?
European Central Bank and other European governments will not bail out if they mandate austerity measures as the criteria
Effect on Indian Economy
- When an economy falls into a recession, it impacts the affected country’s trading partners too
Impact on Exports
?
The European Union --21% of India's total export Exports to Greece, Spain and Portugal, including Italy is only 4%
?
?
Indian finance minister rightly said that export to PIIGS are marginally low and will not have any impact on it
India exports mainly textiles, pharmacy products, Gems etc. to European countries:- not much affected Now, that Greek has ballooned into a major European crisis the currency value of euro has depreciated The sharp depreciation of the euro has concerned exporters as that could ultimately have cash flow impact on the remittances Economies of EU already introduced cut in spending Such spending cuts could lead to postponement or even cancellation of orders for the Indian exporters
?
?
?
?
?
Impact on Foreign Fund flows
?
International investors lost trust in world markets because of series of crisis in US and Europe
?
But a majority of FII and other individual investors choose Indian markets to invest
?
There was huge inflow of money since start of 2010 till April 2010
?
The sudden surge in Foreign Institutional Investor (FII) has left India grappling with high inflation
?
But if the debt crisis spreads to other nations in Europe and their banking systems, European entities could start repatriation of funds from Indian stock markets
Impact on Indian Economy
Slowdown in the Manufacturing and Service sectors:
?
Due to the contraction in European and American markets, the demand of goods and services from countries like India and China have slowed down considerably. Inflationary pressure has made the cost of products sky high thereby discouraging the consumers.
Market visibility:
?
The global financial markets are volatile which in turn have impacted Indian Financial markets too. High rates of inflation have forced Reserve Bank of India (RBI) to raise interest rates. Prices of Gold and Silver have spiraled up, pushing the inflation rate still higher
Cash hoarding:
? ?
Various Indian firms have cut down on expanding. They are holding their cash and saving it for loan debts as well as shielding them from financial crunches In the wake of the above impacts, our government including RBI has claimed to form a contingency bailout plan for European countries as well as for India
Thank You! ?
doc_439316136.pptx
Timeline of events, How the crisis began? Where it went wrong, Financial Contagion, Main Reasons, Impact on Indian Economy
Tejal Phatak Harsh Dhruva Nirvisha Bhuta
Flow of presentation
?
What is Eurozone?
?
? ? ? ? ?
Timeline of events
How the crisis began? Where it went wrong Financial Contagion Main Reasons Impact on Indian Economy
What is Euro Zone?
? ?
In 1958, an organization called European Coal and Steel Community was formed This evolved into the European Union (EU) which was established by the Maastricht
Treaty
?
Under the Treaty the EU members should limit deficit to 3% of GDP and debt to 60% of GDP
?
Euro became a reality on Jan 1, 1998 , but came for the European consumers on Jan 1 2002
?
It currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain
Timeline of Events
?
In December 2009, Greece admits that its debts have reached 300bn euros and has a debt amounting to 113% of GDP - nearly double the eurozone limit of 60% Fitch, the ratings agency, cuts Greek debt to BBB+, from A-, the first time in a decade the country is rated below investment grade In 2010 The EU announces that the Greek deficit is of 13.7% of GDP more than 4 times the maximum allowed by EU rules In May 2010 the IMF approved a €30bn 3 year loan for Greece as part of a joint EU and IMF €110bn financing package The euro continues to fall and other EU member state debt starts to come under scrutiny, starting with the Republic of Ireland. In November, the EU and IMF agree to a bailout package to the Irish Republic totalling 85bn euros.
?
?
?
?
?
Timeline of Events
?
In February 2011, eurozone finance ministers set up a permanent bailout fund, called the European Stability Mechanism, worth about 500bn euros
?
In April 2011, Portugal asks the EU for help
In May, the eurozone and the IMF approve a 78bn-euro bailout for Portugal In June, eurozone ministers ask Greece to impose new austerity measures before it gets the next tranche of its loan, without which the country would default on its enormous debts The yields on government bonds from Spain and Italy rise sharp as investors demand huge returns to borrow In August , the European Central Bank says it will buy Italian and Spanish Government bonds to try to bring down their borrowing costs, as concern grows that the debt crisis may spread to the larger economies of Italy and Spain
?
?
?
?
Timeline of Events
?
During September 2011 Spain passes a constitutional amendment to add in a "golden rule," keeping future budget deficits to a strict limit Italy passes a 50bn-euro austerity budget to balance the budget by 2013 after weeks of haggling in parliament. There is fierce public opposition to the measures - and several key measures were watered down
?
?
In January Weeks of negotiations ensue between Greece, private lenders and the "troika" of the European Commission, the European Central Bank and the IMF, as Greece tries to get a debt write-off and make even more spending cuts to get its second bailout In February2012 , Greece passes the unpopular austerity bill in the parliament
?
Timeline of Events
?
S&P downgraded France from AAA to AA+ and 8 other eurozone countries
blaming the failure of Euro zone leaders to deal with the crisis
?
Euro zone service sector shrinks unemployment rates hit an all time high, The European Commission predicts that the Eurozone economy will contract by 0.3% in 2012
?
In April 2012, Italian and Spanish borrowing costs increase in a sign of
fresh concerns among investors about the country's ability to reduce its high
levels of debt as they struggle to avoid going the Greek way
How the crisis began?
? ?
Continuous breach of the Maastricht Treaty PIIGS countries had to borrow money at interest rates much higher than the rates at which Germany borrowed
?
After entering the EU they could borrow money at interest rates close to that of Germanyeconomically best managed country in the EU
?
Rest of Europe used Germany's credit rating to borrow as cheaply as Germans could to buy stuff they couldn't afford
?
Inflation in the PIIGS countries was higher than the rate of interest i.e. if the borrowing
rate is 3 per cent the inflation is 4 per cent
? ?
This led to huge amount of debt for Greece which touched 160% of its GDP Government also started to borrow at cheaper rates and paid higher wages to please its
constituency
?
A job which pays 55,000 euros in Germany paid 70,000 euros in Greece even with the fact that Germany is a more productive nation
SPAIN
? ?
Spain had the biggest housing bubble in the world It had as many unsold homes as the United States, even though the US is six times bigger
? ?
Most of these new homes were financed with capital from abroad Spain's real estate debt comes to around 50 per cent of its GDP
AUSTRIA
? ?
In 2004, interest rates in Hungary were at 12.5 per cent
In neighbouring Austria it was 2 per cent and in Switzerland even lower at around 0.5 percent
?
So the Austrian banks, many of which also had branches in Hungary, began to lend to
Hungarian borrowers
? ?
Austrian banks lent 140% of their GDP to countries like Hungary Even though Hungary has put in austerity measures and is trying to repay, if there is a blow up, the Austrian government wouldn't be able to save the banks and ECB might
have to step in
Where it went wrong?
? ?
Private sector borrowing increased rapidly due to cheaper interest rates
Germany 164%, France 224%, Italy 181%, Spain 283% - Private debt as a
percentage of total economic output (non-financial sectors)
? ?
All the debt helped finance more and more imports by Spain, Italy and even France Meanwhile, Germany became an export selling far more to the rest of the than it was
buying as imports
?
Germany was earning a lot of surplus cash on its exports and most of that cash ended up being lent to southern Europe
?
Germany kept its wages constant while Italy and Spain increased wages leading to
price disadvantage and competitive exports
Financial Contagion
?
Germany, France, Britain, USA which are secured economies have lent heavily to PIIGS nations
?
When an ailing country becomes over leveraged and is unable to handle its debt, banks and other financial firms that have lent it money could be exposed to major losses
?
This could unsettle the home country of the banks or even spread the troubles to a third country
?
That can occur, for instance, because banks may try to cover their losses in one country by borrowing loans from another
?
For instance, the German government gives money to the EFSF so that it can give money to the Irish government so that the Irish government can give money to Irish banks so the Irish banks can repay their loans to the German banks
?
In case of Greece, a lot of German and French banks which have lent money will be in trouble if Greece defaults
Main Reasons
?
Eurozone is an economic and monetary union and not a fiscal or a political union
?
Lack of Common (minimum) discipline for budgetary policy binding all EU member states
?
Lack of macroeconomic coordination
?
Lack of supervision in the levels of private debt and asset bubbles
?
Lack of a pan-European debt market (Eurobonds)
Possible Solutions
Cut Spending
?
Will deepen the recession and fuel unemployment (already over 20% in Spain) which may push wages down to more competitive levels
?
Lower wages will make people's debts even harder to repay, will cut their spending even more, or stop repaying their debts
?
And lower wages may not even lead to a quick rise in exports, if all of the European export markets are in recession too
?
Will lead to more strikes and protests and more nervousness in financial markets
Don’t Cut Spending
?
?
Risk of a financial collapse
The amount borrowed has burgeoned since 2008 due to economic stagnation and high unemployment
?
Markets will lose confidence and may fear economy is simply too weak to support its
increasing debt load
?
European Central Bank and other European governments will not bail out if they mandate austerity measures as the criteria
Effect on Indian Economy
- When an economy falls into a recession, it impacts the affected country’s trading partners too
Impact on Exports
?
The European Union --21% of India's total export Exports to Greece, Spain and Portugal, including Italy is only 4%
?
?
Indian finance minister rightly said that export to PIIGS are marginally low and will not have any impact on it
India exports mainly textiles, pharmacy products, Gems etc. to European countries:- not much affected Now, that Greek has ballooned into a major European crisis the currency value of euro has depreciated The sharp depreciation of the euro has concerned exporters as that could ultimately have cash flow impact on the remittances Economies of EU already introduced cut in spending Such spending cuts could lead to postponement or even cancellation of orders for the Indian exporters
?
?
?
?
?
Impact on Foreign Fund flows
?
International investors lost trust in world markets because of series of crisis in US and Europe
?
But a majority of FII and other individual investors choose Indian markets to invest
?
There was huge inflow of money since start of 2010 till April 2010
?
The sudden surge in Foreign Institutional Investor (FII) has left India grappling with high inflation
?
But if the debt crisis spreads to other nations in Europe and their banking systems, European entities could start repatriation of funds from Indian stock markets
Impact on Indian Economy
Slowdown in the Manufacturing and Service sectors:
?
Due to the contraction in European and American markets, the demand of goods and services from countries like India and China have slowed down considerably. Inflationary pressure has made the cost of products sky high thereby discouraging the consumers.
Market visibility:
?
The global financial markets are volatile which in turn have impacted Indian Financial markets too. High rates of inflation have forced Reserve Bank of India (RBI) to raise interest rates. Prices of Gold and Silver have spiraled up, pushing the inflation rate still higher
Cash hoarding:
? ?
Various Indian firms have cut down on expanding. They are holding their cash and saving it for loan debts as well as shielding them from financial crunches In the wake of the above impacts, our government including RBI has claimed to form a contingency bailout plan for European countries as well as for India
Thank You! ?
doc_439316136.pptx