Eurozone debt crises

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Eurozone debt crises

  1. 1. EUROZONE DEBT CRISIS www.wordpandit.com
  2. 2. What is the Eurozone Crisis ?The European debt crisis is the shorthand termfor Europe’s struggle to pay the debts it has builtup in recent decades. www.wordpandit.com
  3. 3. A little History …•In the year 1999 , Euro Currency was launched.•“Inspiration for the € symbol come from theGreek epsilon … crossed by two parallel lines …to ‘certify’ the stability of the euro. “•The idea was to Reduce trading costs Boost tourism Smooth the economy www.wordpandit.com
  4. 4. So what went wrong ?Most governments run a budget deficit. (They Spentmore than they earned)Lack of strong political leadership in the past years hasmeant that the euro was not well supported by goodfiscal and economic policies. We had 17 countries allbehaving differently without any real central fiscalcontrol to ensure that no country was spending morethan it was earning. This was a recipe for disaster. www.wordpandit.com
  5. 5. Major debt ridden countries Portugal Ireland Italy Greece Spain*Together called as PIIGS countries. www.wordpandit.com
  6. 6. Debt by Jan 2012 www.wordpandit.com
  7. 7. A little Background …• Since joining the euro back in 1999, thegovernments of Greece and Portugal (amongother offenders) have gotten used to spending aLOT of money. When times were good, it wasnt aproblem — banks and other investors werewilling to lend them money on the cheap and theirpublic sectors became bloated.•When the financial crisis hit, however, problemscame to a head. Debt levels in Portugal, Italy, andGreece became unsustainable, and taxes in acontracting economy are no longer enough to paythe bills. www.wordpandit.com
  8. 8. A little Background …• Greece, Portugal, and Ireland are still struggling tobring their public debt under control, after receivingbillions of euros in bailout aid from I. the European Commission, II. the International Monetary Fund, and III. the European Central Bank (the so-called troika) www.wordpandit.com
  9. 9. A little Background …• These governments needed this money because it became too expensive for them to borrow cash on the open markets, with speculators demanding high rates for lending and traders even betting on a disorderly sovereign default.• The initial round of aid money helped these governments prop up their banks and pay their bills.• Ultimately, however, Greece needed even more money to prevent an economic collapse. EU leaders agreed in July 2011 that a "selective default" was the only option for Greece. Under this situation, euro area nations guaranteed payouts on Greek sovereign debt, and the countrys private sector lenders agreed to take a loss — a "haircut" — on their debt holdings. www.wordpandit.com
  10. 10. The root cause of the problem !If you think that the problem is about DEBT. No , its not just about the debt.Lenders need to believe that a country can repay its debt,Otherwise the interest rates soars,And borrowing becomes unaffordableAnd then the governments ask for emergency loans ! www.wordpandit.com
  11. 11. Emergency loans taken by governments• May 2010 , Greece 110 bn euros• Nov 2010 , Ireland 85 bn euros• May 2011, Portugal 78 bn euros• July 2011 , Greece (exact amount not known) www.wordpandit.com
  12. 12. Things you should know about the Eurozone CrisisIreland was the first to falterThe Euro crisis has been rumbling on for a couple of years now as thenumber of countries being perceived as having a major debt problem hasincreased. Contrary to popular opinion, the first country to slide into crisiswasnt Greece but Ireland. Throughout the 1990s and 2000s, Ireland had abooming economy, but it relied on massive levels of personal debt and anoverinflated housing market. So when the global financial crisis hit, the Irishwere particularly hard hit. Housing prices plummeted and banks stoppedlending. The country rapidly fell into recession and the governmentsuddenly needed to borrow much more to keep going. Then the Irishgovernment slashed public sector spending, but still couldnt pay its bills.As a result, the U.K. and wealthier members of the Eurozone have boughtIrish government debt to help support the troubled Emerald Isle. www.wordpandit.com
  13. 13. Things you should know about the Eurozone CrisisThe power of the ratings agenciesGovernments around the globe issue trillions of dollars of debteach year. This debt is bought by private investors, financialinstitutions and pension funds. But how do you know goodgovernment debt from bad? That is where credit agencies likeMoody’s and Standard & Poor’s step in: They assess governmentdebt for its safety and give it a rating (AAA being the safestwhile BBB is the weakest). Many have criticized the ratingsagencies for being harsh on Eurozone countries as a strongeconomy like France recently lost its AAA rating. www.wordpandit.com
  14. 14. Things you should know about the Eurozone CrisisThe crisis could spread to the U.K.As of this writing, the UK may be as a safe haven tointernational investors, but it may not last. In 2011, the U.K.government borrowed more than the Greece, and its economyis still sluggish. Meanwhile, the Eurozone accounts for themajority of Britain’s overseas trade and many British bankshold billions of government debt from Eurozone countries. Asa result, Britain is threatened by the Eurozone crisis. www.wordpandit.com
  15. 15. Things you should know about the Eurozone CrisisGreece’s problem is bigger than Euro membershipNearly every economist has their own crazy story about theGreek economy (for example, there are only a handful of peopleregistered as millionaires for tax purposes in Greece but250,000 private swimming pools). Tax evasion and corruptionin the public sector are endemic in Greece. The Greekgovernment finds it impossible to collect the taxes that it needsto keep a lid on public spending. Membership to the Euro ispreventing Greece from devaluing its currency to make exportscheaper and to increase tourism. www.wordpandit.com
  16. 16. Things you should know about the Eurozone CrisisGermany is the key player in the EurozoneWith Europe’s biggest population, economy, and healthygovernment finances, Germany is the powerhouse of theEurozone. No wonder, therefore, that other members of theEurozone look to Germany for help. However, the Germanpeople back the continuation of the Euro, but they do notwant to spend their hard earned money bailing out theweakest links in the Euro. www.wordpandit.com
  17. 17. Things you should know about the Eurozone CrisisThe global financial crisis helped cause theEurozone’s current problemsThe final cost of the global financial crisis of 2007 and 2008has been estimated at $3 trillion. That’s a mind boggling sumand much of it was funded by governments around the globeborrowing in order to pump money into their banks, whichwere on the edge of collapse. At the same time, economiesaround the world fell into recession and tax revenuescollapsed. A big financial black hole was created and it stillhasn’t been filled — if anything it’s getting worse. www.wordpandit.com
  18. 18. Things you should know about the Eurozone CrisisThe global financial crisis helped cause theEurozone’s current problemsThe final cost of the global financial crisis of 2007 and 2008has been estimated at $3 trillion. That’s a mind boggling sumand much of it was funded by governments around the globeborrowing in order to pump money into their banks, whichwere on the edge of collapse. At the same time, economiesaround the world fell into recession and tax revenuescollapsed. A big financial black hole was created and it stillhasn’t been filled — if anything it’s getting worse. www.wordpandit.com
  19. 19. Things you should know about the Eurozone CrisisDebt levels in the U.S.A. and U.K. are higher thanthe EurozoneBecause of Britain and America’s addiction to creditcards and borrowing to buy property, personal debtlevels are actually higher in these countries than theEurozone. Your average French, Italian, and evenGreek person are far less indebted than most Britsor Americans. This has prompted some observers tosuggest that the ratings agencies got it wrong togive France a lower credit rating than the U.K. www.wordpandit.com
  20. 20. How will the Euro zone crisis impact India?Capital flows into the economy and exports are likelyto take a beating. Foreign institutional investor (FII)investment pattern is marked with high volatility. Asudden surge in investment pattern is as detrimentalas an unannounced withdrawal.A surge in FII investments will lead to increasedinflationary pressures and building of an asset bubblethat could burst anytime.India is grappling with high inflation and the centralbank has raised the key interest rates a dozen times inthe past year and a half. www.wordpandit.com
  21. 21. How will the Euro zone crisis impact India?A slump in domestic industrial growth, unaddressedagricultural woes, rising interest rates and escalatingfuel costs have compounded the global factors. A seriesof scandals emerging from under the carpet havediluted the faith of foreign investors.The market volatility has compounded with theconcerns of small investors. Sectors across the boardincluding auto, oil and gas, metal, FMCG and healthcaretook a beating. Concerns are the current Europeanfinancial crisis will curb economic growth.The risk associated with otherwise favorite sectorssuch as banking has increased. www.wordpandit.com
  22. 22. Thank You!Hope you had a pleasant learning experience. Feel free to contact us:mentor@wordpandit.com www.wordpandit.com

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