Euro Crises

7/31/2019 Euro Crises

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Europe Financial Crisis:

Causes, Consequences andIndias Prospects


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Global Financial Crisis (1)

Proximate causes Sub-prime lending

Originate and distribute model

Financial engineering, derivatives Credit rating agencies

Lax regulation

Large global imbalances Fundamental cause

Excessively accommodative monetary policy in the

US and other advanced economies (2002-04)


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Scheme of Presentation

Global Financial Crisis

Impact on India


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Economy impacts other economies via three channels:

Trade Channel

Financial Channel

Confidence channel


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The share of exports to EU (excluding UK) and imports from EU has fallen over the years.

In 1987-88, exports to EU constituted about 18.6% of total exports.

This has declined to 17.5% by 2008-09.

The decline of imports is higher from 25% in 1987-88 to 12% in 2008-09.Hence

Total trade between India and EMU is about 29.5% and could be impacted due to the crisis.

Trade Channel


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Unlike trade in goods which declines immediately,we see a decline in services trade with a lag.

It declines visibly in Jan-Mar 2009 quarter

when the global crisis started in September 2008.

Software exports decline marginally from USD 11.2 bn levels to 10.4 levels

which is great given the global nature of the crisis.Hence, impact of crisis was more on goods and muted on services.


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Foreign Direct Investment:There are many European companies which have investments in India.

So, there could be a possibility of slowdown in FDI in India.

EU economies have contributed about 12.8% of total FDI since April 2000.

But again FDI remained robust throughout this crisis.

Given the severity of the crisis it was felt there will be little FDI investment.

However, in case of India, FDI inflows remained positive throughout the crisis.

The FDI inflows actually helped keep maintain capital account

when all other categories showed sharp decline.


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Institutional Investment:

il in global financial markets, FII inflows will decline.

rge number of global financial firms which operate across the world and in case of a decline in onel out from other markets as well.


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External Commercial Borrowings:

External commercial borrowings could also decline

if the European crisis spreads to other economies.

ECBs declined in the first stage of the crisis as well.


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This channel shows confidence declines in business and households seeing the global uncertainty.

So even if an economys macroeconomic conditions and outlook look favorable, the decline in confidence can disrupt the economic conditi

Decline in confidence is also one of the reasons for de

cline in business investments which led to decline in overall Indian GDP growth.

Credit growth also declined because of decline in business investments.


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India is grappling with high inflation and

the central bank has raised the key interest rates a dozen times in the past year and a half.

Now, the possibility of Greek debt default affecting the European banking and financial sectors is very real.

The crisis is expected to spill over to the other European nations that

otherwise appear economically stable


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The quantum of impact of Euro zone crisis on markets here is yet to be measured.

A slump in domestic industrial growth,

unaddressed agricultural woes,

rising interest rates and escalating

fuel costs have compounded the global factors.A series of scandals emerging from under the carpet have diluted the faith of foreign investors

MOODYS Downgrading Rating of SBI and other public sector bank


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Differences Between Financial Crisis inUS/Europe and India (1)

What has not happened hereNo subprime

No toxic derivativesNo bank losses threatening capital

No bank credit crunch

No mistrust between banks


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Our Problems Fiscal stress

Oil, Fertiliser, Food subsidies

Pay Commission, Debt waiver, NREStimulus packages

GFD/GDP ratio: 5.5-6.0%

Large increase in market borrowings

Gross 1,76,453 3,42,769 3,98,552

Net 1,13,000 3,29,649 3,08,647


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Indias Approach to Managing FinancialStability (1) Current account: Full, but gradual opening up

Capital account and financial sector: Morecalibrated approach towards opening up.Equity flows encouraged;

debt flows subject to ceilings and some end-use

restrictions.

Capital outflows: progressively liberalized.


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Indias Approach to Managing Financial Stability

(2) Financial sector, especially banks, subject to

prudential regulationboth liquidity and capital.

prudential limits on banks inter-bank liabilities inrelation to their net worth;

asset-liability management guidelines takecognizance of both on and off balance sheet items

Basel II framework: guidelines issued.Dynamic provisioningNBFCs: regulation and supervision tightened - to

reduce regulatory arbitrage.


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Euro Crises