Wild Wild West: Unraveling the Euro and USA Crisis

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Situationer on the US and Debt Crisis. Group presentation for Econ 203 (handled by Prof. Renato Reside).

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Wild Wild West: Unraveling the Euro and USA Crisis

  1. 1. wild wild westUnraveling the euro and USA Crises Go magat Miraflor miranda Muangsombut na arro v punongba an sunglao Timbang tolentino y
  2. 2. REPORT OUTLINE     of the crisis overview •  USA Reports •  Smaller Country     •  Germany •  PIIGS Economies •  Out of Zone France •  a Euro STates •  UK Denmark   Synthesis
  3. 3. ov e rv i e wOf the crisis
  4. 4. Overviewof the crisis
  5. 5. Overviewof the crisis
  6. 6. Size according to size oftotal government spending as a % of GDP.
  7. 7. co u n t ryreports
  8. 8. Country ReportUSA
  9. 9. Country Report USA Indicators GDP•  2011: 1.7% o  Q3: 1.8% o  Q4: 2.8%
  10. 10. Country Report USA Indicators Unemp Rate•  December 2011: 8.5%
  11. 11. Country Report USA Indicators Inflation•  Annual inflation rate (2011): 3%
  12. 12. Country Report USA Financial Crisis Update•  September 2011: Operation Twist o US Federal Reserve is trading some of its shorter-term bonds in exchange for longer-term bonds (10-year bonds). o Aims to increase demand for long-term bonds, drive prices up, therefore, driving down long-term interest rates to encourage borrowing.
  13. 13. Country Report USA Narrowing debt gdpDebt levels remain high…
  14. 14. Country Report USAEconomic Growth
  15. 15. Country Report USAConsumption gdp
  16. 16. Country Report USAUnemployment forecast
  17. 17. Country Report USA Economic Trends•  The economic growth looks better as it grew 2.8% from the 1.8% recorded in the previous quarter•  The improvement largely came from businesses stockpiling goods they had produced, rather than selling them•  Unemployment rate edged down to 8.6%, as improvements in the labor market became evident
  18. 18. Country Report USA Economic Trends•  Consumer confidence snapped back more than forecast in November as Americans turned less pessimistic on the outlook for jobs and wages, one reason why spending has jumped at the start of the holiday season.
  19. 19. Country Report USAEconomic TrendsUS stocks trim losses, but red on Greek woes.
  20. 20. Country Report USADow JONES AVERAGES1 year 5 days
  21. 21. Country Report USANASDAQ AVERAGES5 days 1 year
  22. 22. Country Report USA Elections 2012•  Obama announced US needs to do more to tackle unfair foreign trade practices and rebuild American manufacturing.•  Obama has set a target of doubling total U.S. exports between 2010 and 2015.•  Tax record and the middle & low income households.
  23. 23. Country reports[EURO SUB-REGIONS] Smaller The Drivers  Eurozones    M The PIIGS  Out of the Zone   Staying Out   Triple A’s    
  24. 24. The drivers M       + Germany   France    
  25. 25. The dRivers Current statusGERMANY•  Debt-to-GDP: 83.2%•  Largest economy in Europe, fourth-largest in the world (nominal GDP) in 2008•  Had better debt and deficit status than most Eurozone members. o German trade surpluses to GDP increased  M    
  26. 26. The dRivers Current statusFRANCE•  Debt-to-GDP: 81.7%•  Second largest economy in Europe, fifth largest in the world.  M    
  27. 27. The dRivers During the CrisisGERMANY•  Acted as a “voucher” that keeps economies intact (e.g. €110 billion EU/IMF loan package over 3 years for Greece)•  Estimated to have made more than €9 billion out of the crisis as investors flock to safer but near zero interest rate bunds.  M    
  28. 28. The dRivers During the CrisisFRANCE•  16 Nov 2011: Frances bond yield spreads vs. Germany had widened 450% since July. But on December the bond yield retreated.•  13 Jan 2012: Standard & Poor’s downgraded France from AAA rating.  M    
  29. 29. The dRivers Where they stand NowGERMANY•  Merkel got 25 of 27 EU countries to sign “Stability and Growth Pact”, which included agreements fiscal controls o  binding limits on budget deficits, sanctions on breaching deficit, debt limits o  "essentially makes Keynesianism illegal” o  may strangle growth  M    
  30. 30. The dRivers Where they stand nowFRANCE•  In a weaker position due to lost AAA credit rating from S&P.•  Sarkozy won’t ratify new accord until after election, but opposition leader Francois Hollande pledged to renegotiate if he win. o Bad for Franco-German relations  M    
  31. 31. The dRivers What they wantGERMANY•  Proposed to impose a European commissioner on Greece, with veto powers over the Greek budget. (failed) o  "Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time."  M    
  32. 32. The dRivers What they wantFRANCE•  Championed financial transactions tax during the summit (e.g. unilaterally impose 0.1% within its borders starting August)•  Financial transactions levy designed to stop currency speculation. Sarkozy expects to annually raise €1 billion to stem deficit.  M    
  33. 33. The dRivers What they Don t wantGERMANY•  Rejected suggestions from IMF, Italy and Spain that size of future bailout funds should be increased (€440 billion).•  Believes that greater integration is needed first. Merkel may have exhausted Bundestag support after successive bailouts.  M    
  34. 34. The dRivers What they Don t wantFRANCE•  Doesn’t want non-euro governments to be given a bigger say in Eurozone. France initially asked to include only 17 countries.•  Doubts the financial viability of non-euro states, such as Poland.  M    
  35. 35. The dRivers W y FOrw a ardGERMANY•  Eurozone suffering from currency imbalance. At one end is Germany’s export economy.•  Large trade surplus means it must either increase savings or be a net exporter of capital in the future.•  Must lend more money to other countries to allow them to buy German goods.  M    
  36. 36. The dRivers W y Forw a ardFRANCE•  Financial Transactions Tax good way to go. o Two-pronged strategy to address the roots of the debt crisis (CDS, speculation, etc.) while raising revenues to address deficits•  Must muster political will to convince UK and the rest of the EU to pursue the FTT track.  M    
  37. 37. The PIIGS M     Ireland,  Italy,     Portugal,   Greece and Spain
  38. 38. The P I I G S Portugal M    
  39. 39. The P I I G S Ireland M    
  40. 40. The P I I G S Italy M    
  41. 41. The P I I G S Greece M    
  42. 42. The P I I G S Spain M    
  43. 43. The P I I G S GDP growth rate M    
  44. 44. The P I I G S Unemployment rate M    
  45. 45. The P I I G S Government Deficit M    
  46. 46. Staying out M     + Denmark   UK      
  47. 47. Staying out for good Reasons for not Joining•  Losing its sovereignty•  Result of the referendum  M    
  48. 48. Staying out for good UK economy Grew by 0.9% during 2011. M    
  49. 49. Staying out for good UK economyInflation fell to 4.2% during December M    
  50. 50. Staying out for good UK economy•  Unemployment rose by 118,000 in the three months to November to 2.685 million, the highest level since summer 1994.  M    
  51. 51. Staying out for good Denmark economy•  Denmarks fiscal position remains among the strongest in the EU. Despite previously meeting the criteria to join the European Economic and Monetary Union (EMU)•  The Danish krone remains pegged to the euro.  M    
  52. 52. Small e zones M     Cyprus,   Belgium,  Estonia,    Malta, Slovakia and Slovenia
  53. 53. Smaller eurozones Estonia•  Eurozone’s fastest-growing economy.•  Lowest Debt-to-GDP ratio, 6.7%•  Highest export growth across the eurozone•  Joined EU only in Jan 2011, and wants to be among decision-makers.•  Parliament approved EU fiscal pact calling for tighter budget rules and sanctions.  M    
  54. 54. Smaller eurozones Belgium•  High public sector debt; needs low borrowing costs.•  Wants to avoid complex treaty change process, which will have to be approved by 9 parliamentary chambers.  M    
  55. 55. Smaller eurozones Belgium•  Unions protest austerity measures. Only 21% support the strikes.  M    
  56. 56. Smaller eurozones Cyprus•  Has EUs biggest public sector spending bill of 15.4%. Heavily exposed to Greek debt.•  S&P downgraded to junk; Moodys and Fitch downgraded to just above junk.•  High borrowing costs locked Cyprus out of international markets. Currently relying on €2.5 billion low-interest loan to meet this year’s finances.  M    
  57. 57. Smaller eurozones Malta•  Experienced positive growth of 2%, yet received rating downgrade from S&P.•  Wants to avoid long treaty change process, but will accept Merkel-Sarkozy plan if theres no alternative.  M    
  58. 58. Smaller eurozones Slovenia•  Badly hit by the global crisis due to its dependency on exports.•  New government has been chosen (via snap election), so political aims unclear.•  Government deems Fitch, Moodys, and S&P rating downgrades as "excessive".  M    
  59. 59. Smaller eurozones Slovakia•  Only member-state which refused to participate in initial rescue package for Greece.•  Against Merkel-Sarkozy plan to stop smaller EU countries blocking permanent eurozone bailout fund decisions.•  PM rejects increase of European Stability Mechanism (bailout fund)  M    
  60. 60. Out of the zone  M            Poland, Sweden, Latvia, Lithuania, CzechRepublic, Hungary, Romania and Bulgaria
  61. 61. Out of the zone Elections 2012•  Poland•  Sweden•  Latvia•  Lithuania•  Czech Republic•  Hungary•  Romania•  Bulgaria  M    
  62. 62. Triple a s M           Netherlands, Austria,  Finland and Luxembourg
  63. 63. Triple a s indicators AUSTRIA FINLAND LUXEMBOURG NETHERLANDSPopulation 8.417 5.401 0.515 16.695(Millions)GDP per $ 41,805 $ 36,723 $ 84,829 $ 42,330Capita (PPP)Unemployment 4.100 7.821 5.755 4.200RateInflation Rate 3.200 3.114 3.582 2.500Net Debt 52.36% -59.748% 19.656% 30.641%  M    
  64. 64. Triple a s Crisis Developments•  Finland demanded for collateral for its share in second bailout package•  Austria and other states deemed this unfair•  Other eurozone countries can demand for collateral but under strict conditions•  Finland against plan to stop smaller EU countries from preventing bailout decisions  M    
  65. 65. Triple a s LUXEMBOURG NETherlands•  2 of the 6 founding members of the EU•  Maintains AAA S&P credit rating o Long-term Outlook: negative  M    
  66. 66. Triple a s LUXEMBOURG NETherlands•  S&P may lower rating in 2012/2013 o Luxembourg: GDP growth of 0.2% in 2012 •  Economy’s dependence on large financial sector; risk o Netherlands: If net borrowing requirements consistently exceed 3% of GDP  M    
  67. 67. Triple a s Austria•  Downgraded to AA+ last January 13 o Outlook: negative; possible further downgrade in 2012/2013 •  Weakening of Austrian banks’ balance sheets may lead to recapitalization -Gov’t debt may exceed 80% •  Economic growth much weaker  M    
  68. 68. Triple a s Finland•  Maintains an S&P credit rating of AAA o Negative outlook; at least 1-in-3 chance of credit downgrade in 2012/2013 •  Sustained government deficits •  Sustained deviation in public finances  M    
  69. 69. Synthesis conclusion
  70. 70. wild wild westUnraveling the euro and USA Crises Go magat Miraflor miranda Muangsombut na arro v punongba an sunglao Timbang tolentino y

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