Eurozone Crisis : A case study on Greece


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Our group was required to do a presentation for Financial Management on the Euro Zone Crisis. We took the example of Greece and did the study. Here are our slides.

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Eurozone Crisis : A case study on Greece

  2. 2. Euro Zone is an economic and monetary union of 17 member states of European Union (EU) that have adopted the euro (€) { as their common currency. Monetary Policy of the Euro Zone is laid out by the European Central Bank (ECB) and fiscal policy by individual states. The euro was introduced on January 1, 1999.Background
  3. 3.  Single Market for free circulation of goods, capital, people and services.  Single currency to eliminate exchange rate transaction costs and risks.  Macroeconomic stability (e.g low inflation) and financial integration of the nations in the Euro zone.  Each member country to become stronger against other big economies.Philosophy of Euro Zone
  4. 4. How Euro Zone CrisisStarted
  5. 5.  Transmission from the United States.  Housing Price Bubble adversely affected the highly leveraged banks in the Euro Currency Zone.  Governments in euro zones tried to prevent collapse of financial system by bail out of banks.  This caused pressure on financial resources of the governments and widened the gap of fiscal deficits.The Euro Zone FinancialCrisis
  6. 6.  BNP-Paribas forced to close funds in August 2007  UK bank Northern Rock taken over by government  German state banks IKB, WestLB, BayernLB and SachsenLB bailed out by government  Irish banks given government deposit guarantees  Switzerland injects funds into UBS  Iceland’s banks unable to roll over short term borrowing, default on deposits of foreignersEuropean FinancialInstitutions under Stress
  7. 7.  Continuous high % of debts to GDP  Large welfare budgets  High public debts  High external debts  Slow GDP growth rateThe major causes
  8. 8.  Portugal Euro being a common  Ireland currency, the crisis in  Italy these countries badly  Greece affected the economies of  Spain other euro zone countries.Countries In Crisis
  9. 9.  Automatic stabilizers of falling taxes, rising welfare and unemployment payments kick in as incomes fall and unemployment rises.  Discretionary fiscal stimulus enacted in most countries, depending on their fiscal positions.  European countries limited by Stability and Growth Pact to 3% fiscal deficits, except in time of “exceptional economic distress.”Fiscal Policy Responses toRecession
  10. 10. What happened inGreece? { A study on Greece
  11. 11.  Greece has been living beyond its means since even before it joined the euro.  Income hit by widespread tax evasion.  May 2010 – 110bn euros of bailout loans.  July 2011 – earmarked to receive another 109bn euros.  October 2011 – the Eurozone asked banks to agree to a 50% "haircut" on their Greek holdings, alongside an enhanced 130bn euro bailout.Why is Greece in trouble?
  12. 12.  2002 – Greece abandoned the drachma as its currency in favour of the euro in 2002, making it easier for them to borrow money. Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics, which went well over its budget. Prime Minister George Papandreou quit the following year while negotiating the 110bn euro bailout package follow-up. Lucas Papademos has negotiated a second bailout of 130bn euros, plus a debt writedown of 107bn euros. The price: increased austerity and eurozone monitoring.
  13. 13. The Impact
  14. 14.  High interest rates on bonds  High unemployment  Foreign trade badly affected  Exchange rate of Euro was adversely affected  Downgrading of rating of euro zone nations  Low confidence of global investors The financial crisis caused slow down in euro zone and global economyImpact On Euro Zone
  15. 15. Credit in the Eurozone (% change)
  16. 16. Financial markets have become much more reluctant to lend to euro area countries . . . . especially those with higher debt and deficit levels:  Portugal?  Spain?  Italy?  Belgium? This has led to sovereign debt crisis.Where will it end?
  17. 17.  Negative impact on foreign trade Impact on financial/ capital market Slowdown in foreign remittances and NRI deposits Impact on jobs of Indians in euro zone countries Euro zone crisis would impact global investor confidence Impact On India
  18. 18. PSR { Possible Scenario and Resolutions
  19. 19.  Once Greece defaults, banks having Greek debt will be at loss  Other countries will likely follow to default as investors become worried about risks in the region  Portugal is most likely to follow, followed by Irish Republic, Spain and Italy Generalized Banking Crisis likely will followOutright Defaults by crisis nations
  20. 20.  De-evaluation of currencies of these nations would be certain  Collapse of financial system of these nations  International creditors would incur huge losses  Businesses would go bust and these nations face high Inflation  Mass emigration of skilled labor, towards other EU countries  New barriers to trade may come upGreece and other crisis nations exitthe Euro
  21. 21. Creation of common euro bonds which would allow weaker euro nations to share credit rating of stronger nations such as Germany and hence to borrow at lower rates. This is unlikely as why Germany would guarantee debts of other nations.Common European Bonds
  22. 22. In the past, ECB has bought bonds of weaker nations. However, it cannot do so endlessly. As it would mean printing of new currency and buy bonds , leading to an inflationary flood of money, creating another crisis.ECB buys bonds of weaker nations
  23. 23.  To allow euro zone crisis nations to borrow at low rates with long maturities.  For this financing is needed from countries having a large foreign exchange reserves such as China.  Whether China would bailout euro zone nations and to what extent , is to be seen ?International Monetary Fund (IMF)Rescue
  24. 24. Financial policy Regulation, Liquidity provision, State-contingent supervision capital exit from public (micro- and injections, credit support; audits, macroprudentional) guarantees, asset stress tests, relief recapitalisation, restructuringMonetary policy Leaning against Conventional and State-contingent asset unconventional exit from cycles expansions expansion, safeguarding inflation anchorFiscal policy Automatic Expansions plus State-contingent stabilisers within automatic exit from medium-term stabilisers, while expansion, frameworks, respecting safeguarding leaning against fiscal space sustainability of asset cycles considerations public financesStructural policy Market flexibility, Sectoral aid, part- State-contingent entrepeneurship time exit from and unemployment temporary support innovation compensation
  25. 25.  Recently the Greece government has approved tough austerity measures to get bailout package from international creditors.  There are vast demonstrations in Greece for reducing minimum wages & welfare budgets.  Bailout packages for other crisis nations to be followed.Recent Developments
  26. 26.  Previous economic crises in Europe have led to large devaluations of currencies.  Within Eurozone, single currency prevents devaluation , provides automatic financial support through capital markets.  Non-euro currencies depreciated sharply in 2008, British pound sterling, Swedish kronor, Polish zloty, Hungarian forint.The Role of the Euro
  27. 27. Changes in Budget Balances
  28. 28. Greece’s Debt Dynamics
  29. 29.  Euro Zone crisis has been the combined result of US financial crisis and excessive debts with slow GDP growth rates. This crisis has badly affected the financial market, capital market and global economy. The crisis nations are in bad shape and are looking for bailout packages. ECB, IMF, International creditors and stronger nations are considering various options to resolve the crisis. The situation is grim and there is no immediate solution to the problem and it has long term affects on global economy. Conclusions
  30. 30. A presentation by Tamrish Sinha Ganesh Nagarsekar Aniket Chaudhary Kshitij Jain Aniket Pant Sameer Pendse Kushal KhandelwalThank You