2. Flow of Presentation
 Introduction
 Making of the Crisis
 PIIGS
 Solutions
 Possible Future Scenarios

4. Introduction:
 In 1958, an organization called European Coal and
Steel Community was formed.
 This evolved in European Union (EU) which was
established by the Maastricht Treaty in 1993.
 The EU introduced Euro in 1st January, 1993.
 From that day 11 countries started using Euro.
 There are 27 counties are in the European Union
 Currently 17 countries have the EURO currency.

5. Late 2009,Investors started loosing confidence.
Problems rose in early 2010,for PIGS to refinance it’s
debts.
The onus of the bail out falls on Germany , the
strongest country in the Euro Zone.
The current euro crisis threatens to shake the financial
world.

6. Making Of The Crisis
• Rising In Government Debt Levels
• Trade Imbalances
• Monetary Policy Inflexibility
• Loss Of Confidence

7. Rising Government Debt Level
 Violation of Maastricht Treaty
 Average fiscal deficit in the euro area in 2007 was only
0.6% before it grew to 7% during the financial crisis.
 average fiscal deficit in the euro area in 2007 was only
0.6% before it grew to 7% during the financial crisis

8. Trade Imbalance:
 Imbalance in BoP
Monetary policy inflexibility:
 Week Euro Countries do not have option of currency
devaluation.
Loss of Confidence:
 As the crisis developed it became obvious that
Greek, and possibly other countries', bonds offered
substantially more risk.

10. Greece
 Government ran a huge deficit
 To finance public sector jobs, pensions, and other
social benefits
 Initially currency devaluation and then introduction of
Euro gave borrowing power
 Misreported financial statistics with help of Goldman
Sachs
 After the 2008 recession – Greece economy took a hit
as it’s main industries (shipping and tourism) were
affected

11.  Revised its deficit from an estimated 6% to 12.7%.
 In May 2010, the Greek government deficit was
estimated to be 13.6%
 Debt is reported to be 120% of the GDP
 Downgrading of the debt
 Austerity measures

17. Ireland
 The Irish economy expanded rapidly during the Celtic
Tiger years (1997–2007). This led to an expansion of
credit and included a property bubble which petered
out in 2007.
 State guaranteed the six main Irish-based banks that
financed the property bubble
 Irish banks lost an estimated 100 billion euros
 Shifted the loss to taxpayers
 GDP contracted by 14% & unemployment rose by 14%

18. Italy
 The debt of Italy has increased to almost 120 percent of
GDP
 Longer maturity and is held domestically
 Deficit is 4.6%

19. Portugal
 Government encouraged over expenditure and
investment bubbles through unuclear public private
partnerships
 Funding of numerous ineffective and unnecessary
external consultancy and advisory of committees and
firms
 Increase in redundant public servants

20. Spain
 One of the largest Eurozone economies
 The country’s public debt relative to GDP was 60
percent in 2010
 Most of it controlled internally

22. Is there a way out?

23. CURRENT ACCOUNT BALANCES OF MAJOR EURO
STATES

24. European Financial Stability
Facility (EFSF)
 Established on 9th May,2010 this facility aims at
providing financial assistance to countries in need.
 They can issue bonds or debt instruments in the
market.
 Emissions of bonds are backed by guarantees given by
the euro area member states.
 It has a lending capacity of 440 Billion Euros.

25. European Financial Stabilization
Mechanism (EFSM)
 It is an emergency funding program reliant upon funds
raised on the financial markets.
 It is guaranteed by the European Commission.
 It has the authority to raise up to €60 billion.
 It runs parallel to the EFSF.

26. Breakup of the Eurozone
 Economists always criticize Euro currency system
because of lacked a central fiscal authority
 They recommended that Greece and the other debtor
nations unilaterally leave the Eurozone, default on
their debts, regain their fiscal sovereignty, and re-
adopt national currencies
 Bloomberg suggested in June 2011 that, if the Greek
and Irish bailouts would fail, an alternative would be
for Germany to leave the eurozone in order to save the
currency through depreciation

27. Eurobonds
 European Commission suggested that Eurobond
issued jointly by the 17 euro nations would be an
effective way to tackle the financial crisis. Using the
term "stability bonds

28. ECB interventions
 It began open market operation buying government
and private debt securities in May 2010, reaching €211.5
billion by end of 2011
 It loaned €489 billion to 523 banks for an exceptionally
long period of three years at a rate of just one percent.

30. Scenarios: Next potential flashpoints for
euro zone debt crisis
 Rating Agencies
Standard & Poor's -It could downgrade 15 euro zone members, including
'AAA'-rated Germany and France, if EU summit failed to provide
measures to tackle the debt crisis.
Moody's Investors Service- It intends to review the ratings of all 27
members of the European Union in the first quarter of 2012
 Rescue Funds
The European Financial Stability Facility (EFSF)-250 billion euros.
The European Stability Mechanism (ESM)- 500 billion euros in mid-2012

31. But The ESM is still 6 or 7 months away and Germany has refused to
let it have a banking license which would allow it to draw upon ECB funds
while the US and others appear reluctant to give the IMF more resources
 Italy, Spain and France together have to raise an average 17 billion euros
of government debt every week in 2012, leaving plenty of scope for a
funding accident.
 Italy-Pushing through a harsh austerity program, including pension
reform, tax hikes and spending cuts, which is vital to avoid Italy
becoming insolvent.
 Spain -Tough amendments to a labour reform to help untie wages from
inflation and to raise competitiveness partly through cutting business
tax rates and wants to finish off a restructuring of the financial system.

32. Four Possible Scenarios
 Successful Resolution of Crisis
 Orderly Greek Default
 Disorderly Default-Banking Crisis in EU
 Collapse of Europe

33. Successful Resolution of Crisis
Environment
 Effectiveness of ESFS, EFSM
 European countries experience slow recovery at 1.6% in2012(ECB
Central Forecast)
Best policy Responses(FP Tight MP Tight)
 Tight Fiscal policy supported by IMF programmes
 Tight monetary policy to defend exchange rate
 Growth policy should focus on improving productivity and innovation

34. Orderly Greek Default
Environment
 Expanded ESFS buys bonds of indebted countries
 Export demand leading to job losses
Best Policy Responses
 Expand – Expand government expenditure to support demand in
countries with lower external debt; cut taxes (flat taxes) and widen the
tax base
 Maintain tight monetary policies to support exchange rates
 Countries should press for faster EU entry to access ESFS/EFSM and
structural funds to support long term growth

35. Disorderly Default-Banking Crisis in
EU
Environment
Europe's banks must find of 115 billion euros extra capital to make them strong enough to
withstand the euro zone debt crisis
 Disorderly Greek default triggers banking crisis
 Contagion to other indebted Eurozone countries
 EU banks pull out reducing staff and branches, consolidating to smaller size
Best policy response (FP loose, MP loose)
 Central banks should expand liquidity to offset foreign bank withdrawal
 Collapse of export demand requires slower fiscal consolidation
 Begin to diversify exports to emerging markets
 Temporary capital controls to prevent capital flight
 Industrial policies plus temporary job creation

36. Euro zone Break Up
Environment
 Greece leaves euro triggering others to exit
 EU GDP contracts by 5%; GDP falls by 6% in 2012
 Unemployment rises above 25% in all countries
 Migrants return from EU countries; remittances collapse
Policies (FP tight, MP loose)
 To allow currency depreciation – austerity with changed long run
growth strategy)
 Expand CEFTA to take in Turkey, North Africa
 Rethink speed of EU accession
 Place greater reliance on regional cooperation

37. Sources of Information
 Long-term interest rate "Long-term interest rate
statistics for EU Member States“
 "EU debt crisis: Italy hit with rating downgrade“
 "Peripheral euro zone government bond spreads
widen“
 "Acropolis now“
 "EU ministers offer 750bn-euro plan to support
currency“

38.  "Leaders agree eurozone debt deal after late-night
talks“
 "Angela Merkel vows to create 'fiscal union' across
eurozone“
 "PIIGS Definition“
 "WRAPUP 5-Europe moves ahead with fiscal union,
UK isolated“
 http://www.cnbc.com/id/45653146/Scenarios_Next_p
otential_flashpoints_for_euro_zone_debt_crisis
 http://www.oecd.org/dataoecd/53/58/48789363.pdf