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International Finance
Prepared for:Syeda Mahrufa Bashar
Lecturer
Presentation on:
Debt Crisis in Eurozone
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Submitted by:Group 3
LauraAmin RQ 08
Hisham Haider Dewan ZR 13
Ummey Rehnuma Zaman RQ 14
Ridwan Rahman ZR 31
Ehsan Malek Chowdhury ZR 34
Mujahidun Nabi ZR 35
Lamia Bashar RQ 51
BBA 16
Institute of Business Administration,
University of Dhaka
September 14, 2011
International Finance
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Definitions
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Monetary Policy
Setting of money supply by policymakers in the
central bank
Includes decisions regarding increase or decrease
of money supply
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Budget Deficit
Shortfall of tax revenue from government
spending
Governments finance budget deficit by borrowing
in the bond market
Results in lower national savings
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Government Debt
Accumulation of past government borrowing
Also known as Public Debt, National Debt,
Sovereign Debt
Can be categorized as:
Internal debt: owed to lenders within the country External debt: owed to foreign lenders
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Background
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Euro
Introduced on January, 1999
Official currency of the Euro zone
17 member countries of EU 5 other European countries
Second most traded currency of the world after
US Dollar
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Euro Zone
Consists of -
Austria
Belgium
Cyprus Estonia
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Malta Netherlands
Portugal
Slovakia
Slovenia
Spain
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Criteria to Use Euro as a Trading Currency
Budget deficit of less than 3% of the countrys
GDP
A debt ratio of less than 60% of GDP
Low inflation
Interest rates close to the EU average
Has been widely flouted after the introduction of Euro
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Video
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Benefits of Euro
No transaction cost among the member countries
Price transparency
Eliminating Exchange Rate uncertainty
Inward investment
Benefit of the financial sector
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Problems of Euro
Cost of replacing currency
Loss of autonomy over economic policy
Loss of independence over Fiscal Policy
Asymmetric Shocks
Different effects of Monetary Policy in different
countries Instability of Euro against Dollars
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What Went Wrong?
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Europe's PIGS
PIGS: Acronym for economically troubled
and heavily-indebted countries of Europe.
Consists of four countries:
P: Portugal
I: Ireland
G: Greece
S: Spain
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Video
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Portugal
GDP Growth: 0.9%
Gross Debt in 2010: 84.6% of GDP
Factors leading to Debt Crisis Affect of the financial crisis of 2008
Over-expenditure and investment bubbles through unclear
public-private partnerships
Funding of numerous unnecessary external consultancyfirms
Risky credit, public debt creation
Mismanaged European structural and cohesion funds
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Portugal
Bailout package of 78 billion approved by the Eurozoneleaders in 2011
In return for the deal private bondholders have beeninstructed to maintain their exposure to Portuguese debt,rather than sell it off.
Portugal, has also agreed to reform its health care systemand pursue an "Ambitious Privatization Program ".
Moody's downgraded Portugal bonds to junk status
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Ireland
GDP growth : 0.3%
Gross debt in 2010: 82.9% of GDP
Factors leading to Debt Crisis
Stemmed from the financial crisis of 2008
Exposure of six main Irish-based banks to the property
bubble State guarantee for those banks
Hidden Loans Controversy within Anglo Irish Bank
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Ireland
These factors resulted in Rise in government help for the banks (32% of GDP)
drop of share price of the banks
Increased government deficit
ECB & IMF, proceeded the 85 billion Bailoutagreement in 2010
Moody's downgraded the Irish banks' debt to junkstatus
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Spain
GDP growth : -0.1%
Gross debt in 2010: 36.2% of GDP
Factors leading to Debt Crisis
long term loans
building market crash including bankruptcy of majorcompanies
huge trade deficit
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Spain
The government announced a 50bn-euro
austerity package, including a civil service hiring
freeze
IMF expecting Spain to contract by 0.6%
Many investors feel it will be the next country to
need bailout.
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Greece
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Greece Economy
27th largest economy
Very high HDI, ranking 22nd in the world
One of the fastest growing in Eurozone in2000-07
Annual growth rate 4.2%
Revenue depends on Tourism and shipping
industry
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What Led to AnotherGreek Tragedy?
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VIDEO
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After-effect of Recession
High budget deficit
Less FDI
Collapse of tourism and shipping industry
Revenue down 15%
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Greek Government Conspiracy
Issues of creative accounting and manipulation
of statistics
Paid Goldman Sachs and other banks hundreds of
millions of dollars in fees since 2001
Hide the actual borrowing from EU
Cope with the Monetary union guidelines
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Overspending & Tax Evasion
Government continued overspending
Tax evasion costs over $20 billion per year
Budget deficit peaked to 153% of GDP bymid 2011
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Bailout Loan Package
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Bailout Loan Package
On 23 April 2010, the Greek government
requested that the EU/IMF bailout package be
activated
A total of110 billion has been agreed.
The first installment covered 8.5 billion of Greekbonds that became due for repayment
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Internal Impact
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Decrease in Credit Rating
Just after 4 days of Bailout announcement -
On 27 April 2010, the Greek debt rating was
decreased to BB+ (a 'junk' status) by S&P
Following downgrading by Fitch and Moody's
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Increase in
Bond Yield
S&P lowered
the debt
rating toCCC, the
LOWEST in
the world
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Decrease in Euro Value & Share Price
Euro was traded lower against US Dollar
Standard & Poor's estimated that in the
event of default, investors would lose 30
50% of their money.
Stock markets declined
Share price of Greek Banks went down
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Protest Against Austerity Packages
Conditions to be fulfilled in order to get the loan
Included:
- reduction in salary, pension and benefits- increase in retirement age
- cut in public sector allowances
- indirect tax and special tax etc.
Nationwide general strike was held where three
were killed, dozens injured, and 107 arrested
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Negativity Towards Government
A survey on 18 May 2011 resulted that,
62% of the people felt that the IMF memorandum
that Greece signed in 2010 was a bad decision
65% felt that IMF is hurting Greece's economy
64% felt that the possibility of bankruptcy is likely
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What Factors Made
the Greek Debt Crisis
Severe?
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Credibility Problem
Greece struggled to convince international creditors
This is due to their low growth rate, high deficit, low
FDI
Market responded to crisis before downgrades
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No Control Over Monetary Policy
Cannot print money or inject it into
system
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Crisis in Industry
Industry did not boom after recession
Negative growth GDP
Strikes
People refused to pay tax
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Effect of Greek debt
on other countries
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France, Germany, UK, US
Wont be able to raise revenue
Wont be able to meet their
obligations
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Governments fear if one country
moves away from the Euro,others might follow
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Macro Factors of DebtCrisis in Eurozone
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Macro Factors
Odious Debt Greeces national debt
Does not serve nations best interests
Considered personal debts of the regime
Not debts of state; should not be enforceable
Credit Rating Agencies Moody's, S&P and Fitch
Conflicts of interest Give generous ratings
Tend to act conservatively
Take time adjusting when a firm/country is in trouble
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Macro Factors
Media Attempt to draw international capital away from euro
UK and USA continue funding large external deficits
matched by large government deficits
Only "bad" news propagated by media; never "good" news
Role of Speculators Accused by Spanish and Greek Prime Ministers of worsening
crisis
Role of Goldman Sachsin Greek bond yield increases under
scrutiny
Some markets banned naked short selling for few months
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Long Term Solution
d l f l d
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Orderly Default And
Reintroducing Domestic Currency
Expert opinion: major troubled country like Greece
should engineer an OrderlyDefault on public debt
This will result in
withdrawal of Greece from the Eurozone and
reintroduce a national currency, such as Drachma, at a debased rate
Delay in organizing an orderly default might hurt EU
lenders and neighboring European countries even more
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Measures taken by ECB
Open market operations buying government and
private debt securities
Two 3-month and one 6-month full allotment ofLong Term Refinancing Operations (LTRO's)
Reactivation the dollar swap lines with Federal
Reserve support
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EFSF And European Treasury
European Financial Stability Facility (EFSF)
Legal instrument jointly & severally guaranteed by
Eurozone countries' governments
European treasury
single authority for the EU member countries
responsible for :
o tax policy oversight
o government spending coordination
Common fiscal policy
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How does EurozoneCrisis Affect Asia?
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Effect on Asia Good News
Little immediate risk in the Eurozone crisis
banks in the region have less exposure to Greek debt.
Strong international financing position
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Effect on Asia Bad News
Descent in Stock markets across the continent Japanese Nikkei Index - 2.6%
Hong Kongs Hang Seng Index - 1.5%
Chinas Shanghai Stock Exchange - 0.3%
Fears in China and the rest of Asia of a significant
economic downturn
Credit markets seizing Growth hampered
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Effect on Asia Bad News
Appreciation of the Yuan: During august 9-15 2011, Yuan appreciated 1.2%.
Inflation
Lower magnitude of the trade balance in Chinas favor
Depreciation of the Euro Exports from Asia more expensive
Markets shrinking further
Huge loss might result in economic downturn
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Impact onBangladesh
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Impact on Bangladesh
Weakened Balance of Payments (BoP) due to
reduced remittance flows
rising import bills
Dip in export earnings growth Reduced EU and US demand
Increased the exchange rates of the Swiss Franc
Impact of debt was low because of low exposure to
European debt
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Takeaways
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Background of Euro and Eurozone Introduction to European Debt Crisis
Europes PIGS
Details on Greece debt crisis Effect of Greece Debt crisis on other countries
Macro factors of debt crisis in the Eurozone
Long-term solution
Impact on Asia and Bangladesh
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Sources
http://en.wikipedia.org/wiki/European_sovereign_debt_crisis
http://www.bbc.co.uk/news/
http://www.economist.com/
http://www.cnbc.com/id/43440375/Wall_Street_Economist_Greece_Ripple_Effects_Could_Create_An
other_US_Financial_Crisis
http://curiouscapitalist.blogs.time.com/
http://www.reuters.com/
http://www.seigniorage.de/financial_crisis.php
http://www.csmonitor.com/World/Europe/2010/0428/Will-the-Greek-debt-crisis-affect-Asia
http://www.wsws.org/articles/2010/may2010/shar-m21.shtml
http://www.moneyweek.com/news-and-charts/economics/moneyweek-asia-why-the-eurozone-crisis-
wont rattle asia 01806
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