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The impact of Europe debt crisis on the world economy P a g e | 0

Assignment of Banking and Finance

The impact of Europe debt crisis

on the world economy

Assignment of Banking and Finance.

Pham Thi Hong Nhung – BA 09028

Luong Viet Thai Hung – BA 10008

Quan Dieu Anh – TH 09008

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Table ContentI . Introduction ……………………………………………………………………………..2

I I . Impact on the world (USA, Europe, Japan and Asian f inancial markets) ………...…4

I I I . Possible impact on Vietnamese Financial M arket and Economy………………….10

I V. Conclusion ……………………………………………………………………………13

V. References …………………………………………………………………………14

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I. Introduction:

Europe Debt Crisis has become the biggest threat to the global economy. International Monetary

Fund (IMF) confirmed most disturbing areas of the global economy today is Europe, where the

debt crisis and the financial problems of banks to disrupt the financial markets.

First of all, Greece has been widely recognized with a debt US $ 236 billion, of which 75 billion

debt France, 45 billion debt Germany and 15 billion debt UK. However, this block has not

seeped into where compared with the two neighboring countries are also on the crisis such as

Spain and Portugal. Spanish debt totaling US $ 1100 billion, i.e. more than four times the debt of

Greece, including 238 billion for Germany, 220 billion to 114 billion with France and Britain.

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This country is the unemployment rate is 20% and the economy is almost the weakest continent.

Portugal debts total 286 billion dollars, of which one third debt Spanish (86 billion), debt

Germany 47 billion , debt France and Britain 24 billion and 45 billion, etc. According to

analysts, the debt crisis could create a "domino effect" in Europe as banks in the region have

close ties with each other. In addition, the European banks also hold a volume of government

bonds due in large countries in the circulation area. (Vietnam and International News)

So far, it has been affecting to the European Union

members, such as: Germany and France will have

to share the burden of huge bailout for the

difficulties members of the community, so

resources for their domestic policies will be less.

About banking industry is a sharp decline. Banks

in Germany, Britain and France, now stick to the

huge amount of money they think is debt security.

So, Europe Debt Crisis has the blasting power to

cause a new round of bank panic. Recognizing this

problem the bank may require government aid.

That is why the crisis presents a challenge to the UK, Germany and France. Especially at this

time cannot exclude the case of the debt crisis of the Southern European countries could spread

into a financial crisis new world, due to the insolvency of the financial market in Europe with

swap contract the credit risk (Credit Default Swap - CDS). The economic recovery became

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uncertain, global economic was slowdown, particularly when the unemployment rate to rise

again near the two times. Other countries has been affected with suffering the big deficit such as

Italy (12%), Spain (11.2%), Portugal (9,4%) in 2010. (International Finance News )

Vietnam's economy has pretty deep integration into the world

economy, reflected in the rate of import, export and foreign

investment flows into Vietnam rather high percentage. With what has

and is happening, Vietnam will be affected to certain import and

export activities, investment flows directly and indirectly. In addition,

exchange rate stability and psychological well on the stock market is a

challenge. Expansion of public spending are also putting pressure on the budget deficit problem

of Vietnam. Growth model relies heavily on external sources of capital become vulnerable if the

global economy has stalled. (Crisis News Forum).

II. Impact on the world (USA, Europe, Japan and Asian financial markets)

In November 2009, Greek Finance Minister announced that the fiscal deficit for 2009 would be

12.7% of GDP, more than double previous (6%), and four times higher than permitted level of

Eurozone (3%). Psychological crisis began to appear on the market. The Greek government

declared that if they do not receive any aid before May 2010, they will have no way to repay

debts worth 20 billion euros coming due. For the loans from 300 to 400 billion euros, people

thought Greece may violate agreement for loan , investors began selling off bonds Greece, it

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made the government cannot issue new bonds to get money to pay old debt. Debt crisis of the

Greek outbreak. (The Euro price decrease)

The cause is derived from Greek, which has the highest level of debt in Eurozone, it was 144%

of GDP in 2010. When the cash flow came into Greece massively, of course they may know

what they have to face, it is escalation of prices of Greece is stronger than others countries in

Europe. And deflation increases the debt, which showed the weaknesses of the Eurozone (the

common currency, but independent of fiscal policy). (The Euro price decrease)

Easily to see the consequence that how much debt increase, the angry wave of people also

increase . The strikes and protests to cut wages and pensions paralyze the operation of many

companies in Portugal. Italy and UK students protest to reduce budget of education. It made

Europe really faces a debt crisis of the century.

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Following Greece, Iceland

actually need 130 billion euro to

be able to overcome the serious

budget deficit (expected in 2010

may exceed the threshold of 32%

of GDP, more than 10 times the

permitted level of the Eurozone),

and revive the fragile banking

system. When the "financial disaster" of Ireland has not resolved yet, some countries in

Eurozone and ECB advice Portugal should ask the aid from IMF. Spain also appeared real estate

bubble and the debt situation of private enterprises increased rapidly. After the real estate bubble

burst, the Spanish economy came into recession, and has to face unemployment rate (from 2007

to now has more than doubled, to nearly 20%). According to incomplete statistics, the total

public debt of Spain up to nearly 1,000 billion dollars (about more than 3 times Greece's debt),

and the debt of the private enterprises get the same number. Following the domino effect, the

next country is Italy. According to latest statistics of Italy's central bank announced the debt of

this country is more than 1840 billion euros. (News Finance world ) (The Euro price decrease).

Europe has to face with unemployment and high inflation, depreciation of the euro, GDP growth

declined, as real incomes of the people as well as demand for imported goods dropped sharply,

which affected negatively the exports of countries and regions close to Europe. In addition, the

debt crisis in Europe makes money come to secure shelter, particularly precious metals like gold,

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can make stocks, bonds fell, causing for attracting

investment capital from countries become more difficult.

Mike Daly, an expert on gold, said: "Gold prices are

affected greatly by the dollar and euro. Session at the time,

the dollar is weak, but after dollar be strong again; gold

prices evaporated". (The Euro price decrease)

It was strange that the economy of Asian countries is stronger than the aging industrialized

countries of Europe. Asian countries have almost no debt, surplus in the budget, and trade

balance. Unlike other European banks, the banks of these countries are not attracted by the real

estate, and financial products. Thus, Asian countries do not have to worry about the crisis in

Greece, or afraid too much about the evaluation of the financial appraisal organizations such as

Standard and Poor. (International Finance News )

The Euro price continuously decrease . A big question is how it impact on the US economy? The

Euro was down to its lowest level in four years against the Dollar. The euro has depreciated 14%

against the dollar. Inflation rate is too fast and too big, so some experts did not hesitate to predict

that the euro will be given "parity" with a dollar in the near future as well. Not only the stock

market, but also many other sectors of the global economy are affected.. EU is still remains the

address of US exports in 2009, although affected by the crisis, however it is not as strong as

exports to Canada, and China. If this trend continues, many American companies operating

mainly in the EU will take a lot of damage. It may make goods originating from EU cheaper

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(because of the weak Euro) and American goods competitive not only more difficult in the EU,

but also global market. Ian Shepherdson concluded: "A further decline in Europe not only

prevent, but also worsen the full restoration of US economy." (Europe's Debt Crisis affect US)

Because of relying less on investors bond internationally, the Japanese government is expected

to meet the challenge only in matters of debt when domestic investors are no longer indifferent to

bonds issued by Tokyo. According to data of the Central Bank of Japan (BOJ), only 6.4% of

outstanding government bonds are held outside the Japanese borders. Thus, the liquidity has also

been made easy without depending much on the situation of supply and demand in international

markets. For investors, the Japanese government bonds are still attractive. (World Finance)

Impact on banks in the world famous:

Concern about the situation in Europe has been clearly reflected on the Chicago Mercantile

Exchange (CME), where the Euro‟s contract get 60 billion euros, gain 71% over the same period

last year. (EU Crisis)

Although the European Central Bank (ECB) has attempted to offer a variety of measures such as

spending a large amount of money to save the euro by buying government bonds from

commercial banks, maintain low interest rate at record 1%, extending the program of emergency

financial assistance for low-cost commercial banks. However, the debt crisis of Europe after a

year is not possible to change direction. (EU Crisis).

Caja Madrid- the second big savings bank of Spanish, needed to receive government aid worth 3

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billion euros to overcome difficulties caused by bad loans originated from the collapse of the real

estate market. A month earlier, Caja Sur, a bank credit nature area with a history of 146 years has

been took over by the Central Bank of Spain. In order to avoid the possibility of bankruptcy, 45

banks will be consolidated into 15 banks. The collapse of the savings banks Spain will cause

serious consequences, including economic and social stability because the total asset value of

bank credit accounted for 40% of total banking assets in Spain, and total debts of these banks

accounted for 48% of the total debt of the Spanish banking sector. Meanwhile, according to

Francisco González, BBVA Chairman, one of the top 10 banks in Spain, the international capital

markets had closed for the majority of companies and financial institutions Spain. (EU Crisis)

On the European scale, many banks are facing interest rate for interbank lending increased, the

ability to recover the debt from the bonds become fragile and less liquidity situation. With banks

facing difficulties in capital, the situation has become worse under the impact of the budget crisis

is spreading across Europe. According to the financial analysts famous Chinese Do Kien Huyen,

by the end of 2009, the European banks holding public debt and private debt of Greece, Portugal

and Spain of price to 1,300 billion dollars. If additional debt of Italy and Ireland, the total amount

that PIIGS countries (countries in

Europe, with a high ratio of foreign

debt, including Portugal, Italy,

Ireland, Greece and Spain) the debt

European banks worth up to over

2800 billion dollars. (EU Crisis).

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III. Possible Impact on Vietnam Financial Markets and Economy.

Export will suffer:

The export industry in Vietnam will be affected in 2 different ways. First of all, the debt crisis

will curb the economic growth of European countries. As a result, the marginal propensity to

consume is going to decrease because European in uncertain about the future so they tend to save

more. This reduction in consumption also decrease the need for exported products and contract

the market of European countries. Finally, the demand for products imported from Vietnam will

shrink. This event will be very disastrous to the exporting Vietnam enterprise, which is operated

to export goods.

Secondly, because of the depreciation of the Euro, the other currencies become stronger. Most

export contract is denominated by the US Dollar. Since the Euro is weaker and the US Dolalr

becomes stronger, the cost of importing goods from Vietnam is higher for Eurozone and a lot of

contracts has been delayed or renegotiated due to this issue. “We offer products with prices in

dollars but now that the dollar has strengthened while the euro has weakened, our EU partners

want lower prices. Therefore, negotiations on contracts for seafood exported to the EU have been

delayed,” Truong Dinh Hoe, general secretary of the Vietnam Association of Seafood Exporters

and Producers (VASEP) said. (News of Saigonmoney)

The Price of Gold will increase due to the capital flight from stock market:

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The gold price act as a confidence index. If people are uncertain about the future and do not trust

the national currencies, they can trade these currencies for gold to store their value, wealth as

well as purchasing power. While the value of Euro is still a question mark, the demand for gold

will increase so the gold price will in turn increase as well. The gold price is now currently

traded at 1,427.90 US Dollars per ounce. (Update Gold Price )

However, gold acts as an alternative for securities such as stocks and bonds. The more money

people put on to hold gold, the less money they have available to channel into securities market.

As a result, the bearish market will dominate.

The cost of issuing debt increase:

Because of concern about sovereign debt default, the cost of issuing bonds is much higher. The

Vietnam national debt relative to GDP is about 53.50% (2010) (List of sovereign state by public

debt), and we also experience budget deficit. Vietnam state deficit reach 0.46% GDp in 2010.

(Investment News). As a result, foreign will be more cautious to invest in Vietnam. It also make

it more costly for the government as well as businesses to issue bond because they must offer

higher yeild to attract buyers. However, this effect is not so strong because the forecast growth is

relatively high (6%) . High economics growth means high tax receipt so Vietnam has money to

pay off its debt and the sovereign default risk is very slight.

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Vietnam businesses must bear high interest rate:

Due to inflation pressure, the interest rate in Vietnam is very high in comparison to the rest of the

world. While many central banks in developed countries have been maintaining the historic low

interest rates in order to stimulate the economic recovery, the prime interest rates in the US, UK,

Japan and the Euro zone are one percent or less (News of Saigonmoney), the State Bank of

Vietnam has to fix a 14% interest rate ceiling (including promotions) for dong deposits,

Certificates of deposits (CDs), promissory notes, bill exchanges and bonds (News of

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Vietnambusiness). This actions aims at preventing the unstable interest rate market. However,

high inflation benefits savers but hurts borrowers. Businesses are experiencing a hard time

mobilizing money from the bank. In the long term, this situation can lower the economic growth

and have a bad impact on the Vietnam economy.

Foreign exchange rates have become unpredictable

The Euro „s debt crisis shake people confidence. As a result, the confidence on the Euro will

decrease. It leads to a depreciation on Euro value and an appreciation on other currencies. The

Vietnam Dong will also depreciate so it will create hardship for businesses deal with foreign

partners because of uncertainty. In addition, the appreciation of US Dollar over Vietnam Dong

also create pressure on foreign currencies reserves as well as foreign exchange availability. The

government can take serious actions to intervene the foreign exchange market to maintain

liquidity in the market.

IV. Conclusion:

This crisis test for linkage of Europe and posed a question about the future of this volume. The

financial crisis and the Eurozone economy forced to “rethink” the monetary system, find defects

and fix weaknesses will help the Euro stronger.

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V. References

BibliographyCrisis News Forum. (n.d.). Retrieved from SaiGon Economic:

http://www.thesaigontimes.vn/Home/thegioi/ghinhan/44654/

EU Crisis. (n.d.). Retrieved from Dan Tri: http://dantri.com.vn/c36/s36-439924/chau-au-nao-loan-vi-

khung-hoang-no-ireland.htm

Europe's Debt Crisis affect US. (n.d.). Retrieved from Turkey and Macedonia friendship:http://turkeymacedonia.wordpress.com/2010/09/01/europe%E2%80%99s-debt-crisis-is-over-

probably-or-maybe-not/

International Finance News . (n.d.). Retrieved from Vietcapital:

http://vcsc.com.vn/(A(SkiNK1TtywEkAAAAN2I5ZWRlNDItZDI5NC00MjgxLTlmNWYtMDZmYjJlYjg

wZDVmyEwjlhb5HJNypBEIM8769Qwcamc1)S(lps4v5552nfmet45uakaqh55))/NewsDetail.aspx?A

rticleId=43727&AspxAutoDetectCookieSupport=1

Investment News. (n.d.). Retrieved from ITPC Vietnam Government:

http://www.itpc.gov.vn/investors/news/2010/12/2010-12-

03.444640/MISNews_view/?set_language=en

List of sovereign state by public debt . (n.d.). Retrieved from Wikipedia English:

http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt

News Finance world . (n.d.). Retrieved from VnEconomy:

http://vneconomy.vn/20100304030933296P0C99/khung-hoang-no-tai-chau-au-dau-la-chien-

truong-ke-tiep.htm

News of Saigonmoney . (n.d.). Retrieved from Saigonmoney:

http://www.saigonmoney.com/2010/05/21/falling-euro-affects-vietnam%E2%80%99s-export-

to-the-eu/

News of Vietnambusiness. (n.d.). Retrieved from Business of Vietnam in Asia :

http://vietnambusiness.asia/credit-institutions-not-allowed-offering-deposit-rates-over-14/

The Euro price decrease. (n.d.). Retrieved from Vitinf- Take note finance history:

http://vitinfo.vn/MMuctin/Kinhte/LA83644/default.html

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Update Gold Price . (n.d.). Retrieved from Gold Price: http://www.goldprice.org/

Vietnam and International News. (n.d.). Retrieved from Finance Vietnam: http://fpts.com.vn/vn/tin-

tuc/quoc-te/2010/12/3b9d2302/

World Finance. (n.d.). Retrieved from Market swing : http://mswing.net/news/tai-chinh-the-gioi/No-

cong-Nhat-Ban-bat-thuong-994/

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