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Europian debt crisis


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Europian debt crisis

  1. 1. Nitesh D. Bhele(PGDM,SIESCOMS)
  2. 2. • The European Union (EU) is an economic and politicalunion of 27 member states which are located primarily inEurope.• The euro (sign: €; code: EUR) is the official currency ofthe eurozone: 17 of the 27 member states of the EuropeanUnion (EU).• What is a debt crisis? It can be defined as the situation where the governmenthas failed to pay back its debt in full. The 2010 European Debt Crisis is the most recentand the only crisis to have its affect on the Europeaneconomy on a large scale.
  3. 3. Causes Of European Debt Crisis• The globalization of finance• Easy credit conditions during the 2002–2008 periodthat encouraged high-risk lending and borrowingpractices• The 2007–2012 global financial crisis• International trade imbalances• Real-estate bubbles that have since burst• The 2008–2012 global recession
  4. 4. • Fiscal policy choices related to government revenuesand expenses• Approaches used by nations to bail out troubledbanking industries and private bondholders, assumingprivate debt burdens or socializing losses.
  6. 6. History• In the period between the Carnation Revolution in 1974and 2010, the democratic Portuguese Republicgovernments encouraged over-expenditure andinvestment bubbles through Public–private partnership.• Funding of numerous ineffective and unnecessaryexternal consultancy and advisory of committees andfirms. This allowed considerable slippage in state-managed public work and inflated top management andhead officer bonuses and wages• Persistent and lasting recruitment policies• Risky credit, public debt creation, and Europeanstructural and cohesion funds were mismanaged acrossalmost four decades
  7. 7. Crisis• The Gross Domestic Product (GDP) in Portugal contracted3.30 percent in the second quarter of 2012 over the samequarter of the previous year
  8. 8. Portugal till 2011
  9. 9. The Portuguese economy• Portugal’s economy has been weak ever sincethe financial crisis began in 2008, and thecountry has actually been in recession for morethan a year.• Portuguese government projected that thecountry’s economy would contract by 3.3% in2012.• Fiscal deficit from 3.1% to 10%• Public debt deteriorated from 68 % of GDP (in2007) to 83 % (in 2009)• As Portuguese companies struggle to pay offtheir own massive debt, it’s hard to imagine thatthey will be able to help pull the country out ofrecession
  10. 10. Bailout• Eurozone leaders officially approved a €78billion bailout package for Portugal, whichbecame the third eurozone country, afterIreland and Greece• As part of the deal, the country agreed to cutits budget deficit from 9.8 percent of GDP in2010 to 5.9 percent in 2011, 4.5 percent in2012 and 3 percent in 2013
  11. 11. Other measures• Average wage cut of 20% relative to their 2010baseline, with cuts reaching 25% for thoseearning more than 1,500 euro per month• Cuts in budget and rise in taxation• In December 2011, it was reported thatPortugals estimated budget deficit of 4.5percent in 2011 would be substantially lowerthan expected, due to a one-off transfer ofpension funds
  12. 12. France Facts• France was one of the six founding membersof the European Community in 1957.• Since the foundation of the EuropeanUnion, France has been a driving force behindmany European projects.• France participates in all of the most far-reaching EU projects, including Economic andMonetary Union.
  13. 13. • France remains at the centre of EU politics. Forexample, the country is the largest beneficiary of theEUs controversial Common AgriculturalPolicy (CAP), which costs 41% of the annual EUbudget.• France is also very influential in the EU.• It has 29 votes in the Council of the EuropeanUnion (the same number as the UK, Germany andItaly).
  14. 14. • France held the Presidency ofthe Council of the EuropeanUnion for six months from 1July 2008.• France is the worlds fifthbiggest economy.
  15. 15. Debt Crisis In France• Frances public debt in 2010 was approximately U.S.$2.1 trillion and 83% GDP, with a 2010 budget deficitof 7% GDP.• By 16 November 2011, Frances bond yield spreadshad widened 450% since July, 2011.• Frances C.D.S. contract value rose 300% in the sameperiod.
  16. 16. • On 1 December 2011, Frances bond yield hadretreated and the country auctioned €4.3 billion worthof 10 year bonds at an average yield of 3.18%, wellbelow the perceived critical level of 7%.By earlyFebruary 2012, yields on French 10 year bonds hadfallen to 2.84%• In April and May, 2012, France held a presidentialelection in which the winner François Hollande hadopposed austerity measures, promising to eliminateFrances budget deficit by 2017 by canceling recentlyenacted tax cuts and exemptions for the wealthy• Raising the top tax bracket rate to 75% on incomesover a million euros
  17. 17. • Restoring the retirement age to 60 with a full pensionfor those who have worked 42 years• Restoring 60,000 jobs recently cut from publiceducation, regulating rent increases And buildingadditional public housing for the poor.• In June, Hollandes Socialist Party won asupermajority in legislative elections capable ofamending the French Constitution and enabling theimmediate enactment of the promised reforms.• French government bond interest rates fell 30% torecord lows, less than 50 basis points above Germangovernment bond rates.
  18. 18. Germany• In 2011, Germanys economy as measuredby GDP produced $3.085 trillion. This makes itthe sixth largest economy, after the EuropeanUnion (EU), the U.S., China, Japan, and India.• Its GDP growth rate was 2.7%, slightly lessthan the 3.5% rate in 2010, but better thanthe 4.7% decline in 2009.
  19. 19. • Germanys GDP per capitawas $37,900 -- lowerthan in the U.S.• Germanys growth was usually less than 1% peryear.• In 2011, GDP percentage share 27%.
  20. 20. for three reasons……• Modernization of Eastern Germany, which initiallycost $70 billion per year, and still ran $12 billion in2008.• High unemployment(9.5%) and an aging population(20% age 65+) means Germany depletes Social Securityfaster than can be added via payroll taxes.• Germany managed to get its budget deficit below 3%of GDP, as mandated by the EU. It lowered fiscalspending, which it what it advocates to solvetheGreece debt crisis.
  21. 21. Germanys Economy BenefitsFrom Its Eurozone Membership:• Germany benefited from its membership in theEU, and its adoption of the euro.• Like many other eurozone members, the powerof the euro meant interest rates stayedlow, which spurred investment.• In fact, many say Germany profited the most fromits membership.
  22. 22. • This gave German companies a competitiveadvantage, which only improved over time.• The resultant prosperity meant that Germanconsumers had more money to buy more locally.• As a result, the domestic market has recentlybecome a more significant driver of economicgrowth.• Its strong manufacturing base meant it had plenty toexport to other members of the eurozone, and coulddo so more cheaply.
  23. 23. • During european greece does not have muchmoney to payback which we have borrowed.• Germany proposed european commissioner beappointed to supplant the Greek government .• This indicate to suspend greek soverity and thedemocratic procee as the price of financial aid toGreece
  24. 24. • German initialy rejected raising ceiling fund of440bn euro to but later on agreed for 500bneuros.• German have decided to bailout gerrce by22.4bn euros for 3 years in the ceiling fund
  25. 25. WHY IS GERMANY IN A DOMINANTPOSITION• Germany encouraged demand for its exports byfacilitating irresponsible lending practices.• Stagnant labor costs and relative high prices ineuro countries helped more German exports• Without these exports,Germany would plungeinto depression.• About 40 percent of German gross domesticproduct comes from exports, much of them tothe EU..
  26. 26. Policy Reactions
  27. 27. European Financial Stability Facility (EFSF)On 9 May 2010, the 27 EU member states agreed tocreate the European Financial Stability Facility, a legalinstrument aiming at preserving financial stability inEurope by providing financial assistance to eurozonestates in difficulty. The EFSF can issue bonds or otherdebt instruments on the market with the support of theGerman Debt Management Office to raise the fundsneeded to provide loans to eurozone countries infinancial troubles, recapitalize banks or buy sovereigndebt.
  28. 28. European Financial Stabilization Mechanism (EFSM)On 5 January 2011, the European Union created theEuropean Financial Stabilisation Mechanism (EFSM), anemergency funding programme reliant upon fundsraised on the financial markets and guaranteed bythe European Commission using the budget of theEuropean Union as collateral. It runs under thesupervision of the Commission and aims at preservingfinancial stability in Europe by providing financialassistance to EU member states in economic difficulty.The Commission fund, backed by all 27 EuropeanUnion members
  29. 29. Brussels Agreement And AftermathOn 26 October 2011, leaders of the 17 eurozonecountries met in Brussels and agreed on a 50% write-offof Greek sovereign debt held by banks, a fourfoldincrease (to about €1 trillion) in bail-out funds heldunder the European Financial Stability Facility, anincreased mandatory level of 9% for bank capitalisationwithin the EU and a set of commitments from Italy totake measures to reduce its national debt. Also pledgedwas €35 billion in "credit enhancement" to mitigatelosses likely to be suffered by European banks.
  30. 30. •The crisis wont stop for a period of time till all debtobligations in eurozone are not cleared.• The situation is because the euro countries are dependenton each other.• Hence the countries are not able to repay the debt tocountries they borrowed from and hence the lender is inthreat of going into debt crisis.• Policy reactions are made to come out from the debtcrisis.