3. The actual impact on the world economy in
general?
•To preserve the Eurozone’s massive
consumer market.
•To prevent a global recession.
•To protect the world financial system
Historically, financial crisis tend to lead to sharp economic downturns, low government revenues, widening government deficits, high levels of debt, pushing many governments into defaults. This is called SOVEREGIN DEBT CRISIS.GREECE was and still is currently facing such a crisis. It accumulated high levels of debt during the decade before the crisis, when capital markets were highly liquid. As the crisis has unfolded and there was liquidity crunch in world economy, Greece may no longer be able to roll over its maturing debt obligations.The Eurozone is facing a serious sovereign debt crisis. Several Eurozone member countries have high, potentially unsustainable levels of public debt. Greece has borrowed money from other European countries and the International Monetary Fund (IMF) inorder to avoid default. With the largest public debt and one of the largest budget deficits in the Eurozone, Greece is at the center of the crisis. The crisis is a continuing interest to Congress due to the strong economic and political ties between the United States and Europe.
Build – Up To The Current Crisis•Between 2001-2008, Greece reported budget deficits averaged 5% per year, compared to Eurozone average of 2%.• Also, its current account deficits averaged to 9% per year compared to Eurozone average of 1%• Greece funded these twin deficits by borrowing in international capital markets, leaving it with chronically high external debt (115% of GDP in 2009)• Some of the facts which can be depicted from following charts.
To preserve the Eurozone’s massive consumer market: A staggering 322 million Europeans use the Euro every day. It’s the currency of seventeen nations. Besides daily activities, these people use the Euro to buy goods and services from overseas — if there was a collapse in its value, then they would be less able to buy imports.To prevent a global recession: A collapse of the Euro or a situation where some European governments would be unable to repay their debt would have a huge, negative impact on the world economy. It would resemble the financial crisis of 2007 and 2008 (in truth, it could be much worse than that). At the very least, businesses around the globe would think twice about investing and taking on new staff while others might start to trim their operations and cut jobs. A global economic recession would be highly likely.To protect the world financial system: Banks around the globe have invested in the government debt of Eurozone countries. These banks also hold large amounts of Euros. If the current crisis gets much worse, then the government debt and currency that they hold will fall in value, which could undermine their own financial well being. It could be like the 2007 and 2008 financial crash all over again, with the global banking system under threat. This would be bad news for everyone.
A prolonged debt crisis in Europe will increase nervousness in the global financial markets. This may result in capital outflows and sharp depreciation in the rupee value. As the Finance Minister PranabMukherjee commented some time ago, the country has to take lessons from the Euro zone crisis and a prudent fiscal management is the need of the hour. Lessons have to be learnt from the Euro zone crisis where sovereign fiscal deficits of some countries have surpassed 100 per cent of the GDP.The fiscal deficit should not be allowed to go beyond a certain limit. The receipts and payments have to be managed so that the fiscal deficit, sovereign borrowings and debts are within manageable limits. The budgeted fiscal deficit target for the year was 4.6 per cent, but with the government's extra borrowings on account of subsidies and resources from disinvestment not coming through, the target is under pressure.So, investors need to wait and watch how things shape up in the coming months.
Impact On Global Financial MarketThis meltdown will cause the governments to have low levels of national savings in Greece and put similar countries in the weakest financial position, at 7.2% of GDP and 10.2% of GDP respectively, compared to an European average of approximately 20%. Complex Financial Instruments & Financial Regulations will push the countries economically and financially lower.
