Group 3-Eurozone Crisis

8/4/2019 Group 3-Eurozone Crisis

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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
http://i/if%20ppt/wiki%20pages/European_sovereign_debt_crisis.htmhttp://i/if%20ppt/wiki%20pages/European_sovereign_debt_crisis.htm


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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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Group 3-Eurozone Crisis

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