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Euro zone crisis


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Reason Behind Euro zone crisis

Reason Behind Euro zone crisis

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  • 1. Euro zone (Union) crisis Presented by Naushad chaudhary PGDM-(Finance) Batch-(2012-14) KOHINOOR BUSINESS SCHOOL MUMBAI INDIA
  • 2. WHAT IS EURO ZONE? • Established: 1st January 1999 • It is an economic and monetary union(EMU)of 17 European Union countries [1-Germany, 2-Italy, 3-France, 4 -Finland, 5-Netherlands, 6-Ireland, 7-Greece, 8-Austria, 9-Spain, 10- Portugal, 11-Belgium, 12-Luxembourg, 13-Slovakia, 14-Slovenia, 15-Malta, 16-Cyprus, 17-Estonia] • They have fully adopted the euro as their national currency. • The main objective behind forming Euro zone: -Reduce trading cost -Boost tourism -Smooth the economy
  • 3. PROBLEMS IN EURO ZONE • Most governments were running a budget deficit. (Spending more than there earning) • All 17 countries were behaving differently (without any real central fiscal control • Lack of strong political leadership
  • 4. INTRODUCTION TO EURO ZONE CRISIS • Began in 2009 from Ireland: 1990 to 2000-Ireland economy was Booming (But relied on personal debt + overinflated housing market) • Other Smaller European countries (PIIGS: Portugal, Italy, Ireland, Greece, and Spain) were having too much debt and become unable to repay them. • The Global financial crises in 2008 affected huge specially to small European countries
  • 5. KEY FACTORS LED TO EURO ZONE CRISIS • Violation of EU Rules: -Countries such as Greece and Cyprus did not give real data about the financial and economic situation -Greece and Portugal were spending more then there revenue -Economy slowdown -Tex revenue started falling down • Banking Sector Problem: Banks were having a highly risky financial instruments in there portfolio such as: -Collateralized Debt Obligations (CDOs) -Credit Default Swaps • Rising interest rates: - Because of Liquidity problem interest rates started picking up - Become difficult for the borrower to repay there loan
  • 6. Interests Rates on 10-year Government Bonds (in percent):
  • 7. • Huge DEBT: Because of rise in interest rates, reduction in government revenue (Tax). DEBT TO GDP RATIO OF (PIIGS) COUNTRIES: (Whole Europe owes €10.84 trillion) in2009
  • 8. • Increase in wage rates: Because of inflation • Investor confidence wavers: Investors started to transfer there money away from the problem. • Key stakeholders tighten their wallets: Reduce spending, Economy slow down, unemployment -Government income started shrinking and debts become harder to repay.
  • 9. MAJOR DEBT RIDDEN COUNTRIES BY JAN 2012  Government debt as a proportion of GDP: • European Union, Government debt in 2012 (85.3% of GDP) • Total debt should be no more than 60% of country’s GDP
  • 10. IMPACT OF EUROZONE CRICIS • Investor’s lose confidence on government securities: - Greek crisis has made investors nervous about lending money to governments through buying government bonds. • Reduced wealth: By raising tax • Unemployment: (Spain is experiencing the highest unemployment rate of 20%) • Global economy slowdown:
  • 11. IMPACT OF INDIA  Capital Market: • high volatility because of FII’s • Big (FII) investment leads to increased inflationary pressures (Building of an asset bubbles)  Exports and Foreign currency inflow: • Slowdown in the Manufacturing and Service sectors: • Depreciation of Rupee (Slow down in Europe, investors investing in US dollar, result USD started appreciating) • 1/3rd of Indian tourist arrive from Euro zone, which is affected badly after Euro zone crisis.
  • 12. • Effect of Euro crisis on Indian Export:
  • 13. PRESENT SITUATION IN (PIIGS)  Budget deficits graph of few European countries: Greece, Ireland and Portugal still struggling to bring debt under control
  • 16. CONCLUSION  The US crisis led to Global financial crisis, which further spread to Euro zone and caused Euro zone crisis, as these countries were most affected.  Hence US should help the countries in problem to come out from the crisis.
  • 17. THANK YOU 