European Debt Crisis 2011

8/3/2019 European Debt Crisis 2011

1/40

1

Group 2Q

2Q Baring, Pauline Grace B.

12Q Garcia, Jennifer C.

Research Report # 1

Effects of Euro Crisis in the Philippine Business and Economy

Introduction..2-3

Review of Related Literature..4-10Conceptual Framework..11

Research Methodology..12

Presentation of Data and Analysis....13-29

Summary...30-36

Conclusion.37

Recommendation...38

Bibliography.39-40


2/40

2

INTRODUCTION

The European Union, since fall of 2009, has been misfortune due to slow-moving

but constant crisis brought about by the huge debts of its weakest economies, such as

Greece and Portugal, and those which are affected repeatedly by the global recession, like

Ireland.

Various solutions, such as bailouts, negotiations, and austerity packages, were

tried to prevent the decreasing confidence of investors or to bring back their previous

growth level to help the struggling countries a way out of their debt traps. By August

2011, European leaders had no choice but to intervene in the markets to protect two

countries hailed as too big to bail out, Italy and Spain.

The crisis caused the worst tensions in history, this was due to the fact that

Germany resisted helping struggling countries because it believed that these countries

were very wasteful. Questions about the survival of euro as a multinational currency were

also raised since countries like Germany were not able to increase their exports by

devaluing their own currency.

The crisis created great risks to most of the banks in Europe, which invested

heavily on government bonds. It also made the government spend less, which heighten

the unemployment rate and put several countries back into recession.

The economic crisis caused a political crisis as well. Governments in Ireland,

Portugal, Greece, and Italy led to a dismissal. The working sector and a lot of young

people joined forces to protest regarding this issue.

When the European leaders tried different measures to save Greece, more reasons

to be frightened appeared. Interest rates for Italy, Europes third largest economy, and


3/40

3

France, whose banks hold large amounts of Italian government bonds, rose. Europes

economy was under an unstable position for a second recession.

Federal Reserve stepped forward to help in the crisis. But the European Central

Bank resisted the same help because they believe that the order to them is to focus only

on preventing inflation and that a political solution is what is really needed, and not their

help.

As the crisis becomes worst, European banks started to save capital by injuring

the finances of their counterparts and other companies around the world that depend on

them for loans.


4/40

4

REVIEW OF RELATED LITERATURE

The Emergence of the Debt Crisis

Consultant Hubert Barnes said that it all started in 2002 when 16 European countries

shared the use of Euro as their currency. It caused interest rates in Spain and Ireland to

fall while the housing market continued to grow at a surprising rate. The price of houses

increased, leading buyers to borrow large amounts from banks in which they could not

afford to pay. Financial analysts, government leaders and banks were forced to face the

fact that financial institutions cannot function if the debtors stopped paying them.

The banks acquired large amounts of debt as consumers defaulted on their loans and

mortgages. Financial institutions couldn't operate smoothly thereby holding the growth

and solvency back of many businesses dependent on bank loans. Massive layoffs resulted

as laborers felt the effects of the collapsed banking system

(http://www.ehow.com/info_8073152_causes-european-debt-crisis.html).

According to J.D. Foster Ph.D., there are two root mistakes that resulted in this

outcome. First is the mistake of adopting a single currency without the economic policy

infrastructure necessary to protect it. The second mistake was the adoption of a generous

social welfare state without attending to the pro-growth policies necessary to sustain such

a state in light on an increasingly competitive global economy. In the face of fierce and

rising competitive pressures from outside Europe, economic growth through rising

productivity and improved economic competitiveness is not merely beneficial, it is

essential to national survival (http://www.heritage.org/Research/Testimony/2011/09/The-

European-Financial-and-Economic-Crisis-Origins-Taxonomy-and-Implications-for-the-

US-Economy).


5/40

5

Another problem is that Greece mismanaged the country's funds and spent large

amounts on projects such as the 2004 Olympics held in Athens. According to a Business

Insider website article, the Greek government paid Goldman Sachs and additional banks

hundreds of millions of dollars to hide the fact that it mismanaged its finances and was in

serious financial difficulty. The public eventually learned that Greece and other countries

were having difficulty paying their debts.

The governments of involved countries began to spend large amounts of money,

trying to help banks endure the developing crisis. They also spent funds to prevent

massive layoffs and create new pension plans.The Main Problem

Investors in the European economy understood the defect in the Euro monetary

unit and traced the primary weakness of using fixed currency for the Euro-zone with no

monetary spending controls and with no limits to increasing large debt. The stock

markets fell, as did consumer confidence in the economy. Consumers stopped spending

and banks stopped lending, the fiscal crisis further deteriorated, and a serious financial

catastrophe began. The impact of the financial catastrophe was felt in Asia, North

America and other parts of the world were adversely affected

(http://www.ehow.com/info_8073152_causes-european-debt-crisis.html).

Europes immediate problem is a pending and building liquidity crisis. European

banks and other financial institutions are experiencing increasing difficulty accessing

short-term credit markets, and depositors are getting very nervous. According to reports,

for example, Siemens recently withdrew 500 million Euros from a French bank. Greek

banks have been on life support from the European Central Bank for months, and central


6/40

6

banks have just recently pumped more billions of dollars into the continental-wide

banking system.

The reason, of course, is that these banks hold vast quantities of doubtful

government debt and some European banks have a solvency problem. Josef Ackerman,

Chief Executive Officer of Deutsche Bank recently explained, Numerous European

banks would not survive having to revalue sovereign debt held on the banking book at

market levels. This view was reinforced on September 20 by Joaquin Alumnia, the

European Unions competition commissioner, who noted that Sadly, as the sovereign

debt crisis worsens, more banks may need to be recapitalized.In this, Alumnia was restating a view presented recently by Christine Lagarde,

Managing Director of the International Monetary Fund (IMF). Lagarde said that banks

need a whopping 273.2 billion (euros) in recapitalization. A big problem in this regard

for credit markets is nobody really knows which bank would and which would not

survive today.

The solvency problem traces to the problem that some governments have issued

debt and run budget deficits to unsustainable levels because these countries also suffer

from an on-going growth problem. This growth problem happens in a way that in good

times they are experiencing little growth and now, they are contracting rapidly. So while

their debt is high and rising, the economy on which the debt rests is flat or contracting.

The larger problem is that the cost structures in many of these countries render

them highly uncompetitive economically, even within Europe and outside. This means

they cannot hope to run the trade surpluses necessary to generate the earnings with which

to pay their foreign creditors.


7/40

7

The immediate challenge Europe faces is that attempts to address the sovereign

debt problem make the economic growth problem worse, making current debt levels less

sustainable. At the same time, issuing more debt in an attempt to buy time to deal with

the sovereign debt problem typically make the bank solvency problem worse by driving

down the value of the outstanding doubtful debt. Attempts to address the financial market

solvency problem by drawing attention to the need for more bank capital often bring the

liquidity crisis to a fevered pitch.

Taking a step back for perspective, the long-run implications of being highly

uncompetitive are catastrophic. Europe will overcome the liquidity problem, the solvencyproblem, and the sovereign debt problem at some point.

In contrast, the inability to compete globally presents problems of an entirely

different nature. Greece is an excellent example. Greece achieved an artificially high

standard of living largely by borrowing from abroad. This also led to increases in wages

and prices that far exceeded productivity growth, leaving Greek producers uncompetitive

within and outside Europe. However, in the good old days being able to borrow from

abroad made up the difference in terms of income. Greek borrowing is today on a very

short string, the economy is contracting rapidly, and with their artificially elevated wage

and price structures Greece cannot hope to generate the net exports and earnings needed

to service its existing debt.

This leaves Greece with two options. One is to let a deep, prolonged depression

drive down wages and prices to the point where Greeces workers and companies can

generate a trade surplus. The other is to devalue. But Greece lacks a currency to devalue;

which is why the arguments about how difficult or painful it would be for Greece to


8/40

8

break out of the Euro are irrelevant. There is no less painful alternative as long as

Germany refuses to work so Greece can enjoy the fruits of German labor. As Financial

Times columnist James Mackintosh wrote in Wednesdays paper, Fixed exchange rates

force economic adjustment via wages and prices; Greece needs dramatic wage deflation

to regain competitiveness against Germany. The political impossibility of slashing pay

packets enough is a reason it may have to leave the Euro, even though living standards

will fall either way (http://www.heritage.org/Research/Testimony/2011/09/The-

European-Financial-and-Economic-Crisis-Origins-Taxonomy-and-Implications-for-the-

US-Economy).An article by Stephen Fidler states that the question of the Euro zone is if it will

survive in its current form. This is caused by the extension of the loans to commercial

banks to prevent the collapse of their banking system.

Investors question the security of their investments in Germanys government

which led to Germanys failure to sell 6 billion ($8 billion) bond issue at an auction.

Some experts note that German yields remain at remarkable and healthy lows, and that

demand for them may momentarily be weakened by the recent flight to them from the

increasingly risky bonds of their southern neighbors, the poor results of the auction was

just over-interpreted.

But after a day, concern over German bonds drove their yields up to near-

convergence with the U.K.'s sovereign debt, which has no clear advantage beyond not

being in euros. In recent weeks, borrowing costs for financially strong euro-zone

governments such as the Netherlands and Finland have increased. Other high-rated


9/40

9

European bondssuch as those for the European Financial Stability Facilityhave

struggled to find buyers.

Yields on ten year bonds have risen which means lower confidence level to the

governments ability to pay off debts. Yields above 6% are risky. The crisis may lead to

the pull out of some investors and the disbanding of some countries from the Euro-zone.

Some Euro-zone leaders speculated the exit of Greece from the Euro-zone as it will be

difficult and costly.

Bond investors bought French government bonds knowing they would face

interest-rate risk: Unless they hedged, they would lose money if interest rates rose. Butit's only recently that it has dawned that French bonds expose them to credit risk, the

prospect that they may not be paid back in full and on time. The reason this emerges with

France, and not the equally indebted U.K., is because of uncertainty about the role of the

ECB.

The central bank is resisting taking on the explicit role of lender of last resort for

euro-zone governments. The ECB says that many legal experts believe it would go

beyond its charter to routinely buy national debt. It justifies its limited bond-buying as

necessary for smooth workings of its monetary policy.

But without the promise of a central bank stepping in as a last resort, a

government liquidity crisis is always at risk of turning into a solvency crisis. Most

investors have been assuming that the ECB has been waiting until the last minute to

intervene decisively. First, the bank is presumed to want a definite commitment on strict

budgetary discipline by governments and the true integration of fiscal policies, including

perhaps a common euro bond proposal as put forward by the European Commission this


10/40

10

week (http://online.wsj.com/article/SB10001424052970204452104577058370049616582

.html).


11/40

11

CONCEPTUAL FRAMEWORK

How does the European

debt crisis affect thePhilippine businessesand economy?

What are the effects ofthis debt-crisis in

Europe?

How does the effect inthe Euro-zone affect

other countries?

How does it affect theeconomy and Philippine

businesses?

How does thePhilippines respond to

this crisis?


12/40

12

RESEARCH METHODOLOGY

1. The researchers identified the required information that will answer the problem.2. The group searched the World Wide Web for articles directly telling the story

about the crisis.

3. The group searched for related articles that may help in identifying its effects.4. The group searched the newspapers for current actions and programs that the

government does to lessen the effects of the crisis in Philippine economy and

businesses.

5. The data is combined according to their category; if the article talks about theEuro zone and if it talks about the Philippines.

6. The outline is followed to analyse the searched data.7. The group came up with its conclusion and recommendation.


13/40

13

PRESENTATION OF DATA AND ANALYSIS

Background

The debt crisis first surfaced in Greece in October 2009, when the newly elected

Socialist government of Prime Minister George A. Papandreou announced that his

predecessor had disguised the size of the countrys ballooning deficit

(http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt

_crisis/index.html).

During the previous decade, Euro was very strong and interest rates were very

low. Greece took advantage of this situation by increasing their borrowings from the

countrys consumers and its government. This caused Greece to be indebted by $400

billion.

To understand how Europe got into this mess, how countries like Greece managed

to borrow so much money that they couldnt pay it all back, a graph from the

Organization for Economic Development and Cooperation (OECD) can be used. On the

right side, youre seeing the story everyone already knows: The market is charging

Southern European countries a lot to borrow. But look at the left side. As recently as

2008, the market was lending to Greece and Germany at pretty much the exact same

price. The assumption was that the euro could never break up, and thus everyone in it was

as safe a bet as the safest, biggest economy on the euro: Germany

(http://www.washingtonpost.com/blogs/ezra-klein/post/the-european-debt-crisis-in-eight-

graphs/2011/12/01/gIQAsmR5GO_blog.html).


14/40

14

This allowed some countries to rack up a whole lot of debt. Greece, for instance,

now holds more in debt than its entire economy produces. This graph, drawn from

European Central Bank data, shows how much more debt European countries are

carrying than they did a decade ago. The green bars show countries debt-to-GDP ratios

in 2000; the blue lines are 2010 (http://www.washingtonpost.com/blogs/ezra-

klein/post/the-european-debt-crisis-in-eight-graphs/2011/12/01/gIQAsmR5GO

_blog.html).


15/40

15

In Spain and Ireland, government spending was kept under control, but easy

money helped turn real-estate booms there into bubbles a process helped in Irelands

case by the aggressive deregulation of its banks that helped draw investment from around

the world. After the bubble burst, the Irish government made the banks problems its own

by guaranteeing all their liabilities (http://topics.nytimes.com/top/reference/

timestopics/subjects/e/european_sovereign_debt_crisis/index.html).

The huge debt of Greece was of course made public after some time. This caused

the markets to react negatively shown by sending interest rates up. What is worse is that

Greece was not the only country affected. Interest rates for Spain, Portugal, and Ireland

also rose.


16/40

16

In early 2010, the European Union and the International Monetary Fund put

together a series of bailout packages for Greece that totaled 110 billion euros ($163

billion) in a process that critics said ended up costing more because European leaders

failed to get ahead of the curve. In May, leaders approved a contingency fund of 500

billion euros (about $680 billion) for the union at large



The said fund was expected to calm investors. Unluckily, in the fall of 2010,

interest rates mounted again. Because of this, different countries, who are reducing theirspending in order to fill their deep shortages, ended up unsuccessful because their

economies moved slower and revenues suddenly declined.

In November, European officials arranged a bailout of 85 billion euros (roughly

$112 billion) for Ireland, after overcoming the resistance of Irish officials to the move,

which they saw an attack on sovereignty (http://topics.nytimes.com/top/reference

/timestopics/subjects/e/european_sovereign_debt_crisis/index.html).

In the spring of 2010, after much hesitation, the European Union and the

International Monetary Fund combined first to offer Greece a bailout package of 110

billion euros ($163 billion), followed by a broader contingency fund of 500 billion euro

(about $680 billion).The hope was that this show of financial force would reassure

markets about the solvency of euro countries (http://topics.nytimes.com/top/reference


Due to the loans and austerity measures for Greece, Ireland, and Portugal, the

crisis grew bigger and dragged Europe into a recession. The solutions made had a very


17/40

17

minimal effect on the problem. In fact, Greeces indebtedness became bigger. During the

winter of 2010 and spring of 2011, governments in Ireland and Portugal fell, and Spain

was unstable.

By the summer of 2011, it was clear that Greece would need a second big bailout

package, and worries rose again about contagion, as Italy and Spain saw the interest rates

charged on its borrowing rise steeply. The European Central Bank responded by buying

large amounts of Italian and Spanish bonds, as leaders put together a plan that would

increase the powers of the European Financial Stability Facility to head off a run' on

governments seen as in danger of default (http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt_crisis/index.html).

By September, with growth slowing, stalled or in reverse across the continent,

European leaders were increasingly discussing the creation of a central financial

authority with powers in areas like taxation, bond issuance and budget approval

that could eventually turn the euro zone into something resembling a United States of

Europe (http://topics.nytimes.com/top/reference/timestopics/subjects/e/european

_sovereign_debt_crisis/index.html).

Europe was not successful in creating a calm atmosphere for the markets by

thinking about long-term solutions. The markets still believe that numerous banks in the

continent were very weak.

When the European officials decided to put the next installment of bailout funding

for Greece in pending, a new crisis was created. That action of the officials might lead to

a sure bankruptcy for Greece.


18/40

18

Earlier that summer, Greece, which had started the crisis, faced its more dire

fiscal emergency, as it stood to run out of cash in August without a new installment of

money from the first bailout. European leaders refused to release the funds until a second,

more drastic round of austerity measures were adopted, including the sale of $72 billion

in state assets. The government of Prime Minister George Papandreou teetered, but the

measure was pushed through after days of giant street protests



T

he basic conflict over the shape of a new bailout plan was between Germanyschancellor, Angela Merkel, who insisted that private banks pay part of the cost by taking

losses on Greek bonds, and the European Central Bank, who opposed even a voluntary

haircut' for banks, saying it would be seen as a default



The deal reached in late July included $157 billion in new funds for Greece and a

modest reduction of its debt burden; private lenders saw their bonds rolled over into

longer maturities but also had them guaranteed. And the European Financial Stability

Facility, the euro zone rescue fund, saw its contingency fund grow to 440 billion euros, or

$632 billion, and was given new, amplified powers and the ability to use the money to

bail out Portugal and Ireland if necessary (http://topics.nytimes.com/

top/reference/timestopics/subjects/e/european_sovereign_debt_crisis/index.html).

The new package was again a failure. Interest rates in Italy and Spain were raised

by the investors. What is worse is that the two countries were the focus of the new


19/40

19

arrangement and the plan went to nothing. The lowered confidence of the investors might

weaken the big banks in those countries. Government bonds started to lose their value.

On Aug. 7, 2011, the European Central Bank said it would actively implement

its bond-buying program to address dysfunctional market segments, a statement

interpreted as a sign that it will intervene to prevent borrowing costs for Italy and Spain

from becoming unsustainable (http://topics.nytimes.com/top/reference/timestopics

/subjects/e/european_sovereign_debt_crisis/index.html).

To address the growing debt crisis, Chancellor Angela Merkel of Germany and

President Nicolas Sarkozy of France met on Aug. 16, 2011 at the lyse Palace in Paris.The leaders promised to take concrete steps toward a closer political and economic union

of the 17 countries that use the euro. They called for each nation in the euro zone to

enshrine a golden rule into their national constitutions to work toward balanced budgets

and debt reduction, a level of discipline well beyond the current, oft-broken commitment.

They also pledged to push for a new tax on financial transactions, and for regular summit

meetings of the zones members (http://topics.nytimes.com/top/reference


The two leaders partnered in order to overcome the crisis. They issued collective

bonds known as Eurobonds in order to help in the responsibility of their government.

They also disagreed with the planned increase in the bailout funds.

Mrs. Merkel said there was no magic wand to solve all the problems of the

euro, arguing that they must be met over time with improved fiscal discipline,

competitiveness and economic growth among weaker states


20/40

20



Despite the good intentions of Merkel and Sarkozy, numerous leaders opposed

their plan and discussed another plan which they think is more appropriate. They believe

that the suggestions of the two leaders might lead to the collapse of euro and more

conflicts associated with bailout issues.

Officials said a major overhaul of the way Europe conducts fiscal policy was

likely to take a long time and require changes in the treaties governing the euro. But they

pointed to the smaller changes that were already taking place as evidence that euro areafinancial ministries see that they have little choice but to move together if they want to

avoid a catastrophic breakdown (http://topics.nytimes.com/top/reference/timestopics/

subjects/e/european_sovereign_debt_crisis/index.html).

The talks took place against a background of increasing continent-wide distress.

Official figures released in August 2011 showed that quarterly growth in the euro zone

fell to its lowest rate in two years. Germany the Continents powerhouse slowed

almost to a standstill. Most of Europes main stock indexes lost ground after the data

suggested that the debt and economic problems in countries like Greece and Italy were

infecting the rest of the 17-country euro zone (http://topics.nytimes.com

/top/reference/timestopics/subjects/e/european_sovereign_debt_crisis/index.html).

Leaders are waiting for the right time to launch their planned bailout fund, along

with the majoritys thought that the next plans wont be sufficient to calm the market

about their fears on the sustainability of big economies such as Spain and Italy. The


21/40

21

Obama administration suggested that they should use the intended funds to guarantee

loans from the European Central Bank rather than directly making loans.

Also in September, Greece pushed through a hugely unpopular property tax

increase as part of a new austerity package needed to keep installments of the first bailout

package flowing. And the euro zones members crept through the process of signing off

on the July agreement, with crucial votes in favor coming from Germany and Finland,

which had threatened to block it unless it got higher levels of collateral on its contribution


_crisis/index.html).The nervous eyes of the investors showed their indirect approval of the plans. But

this created bigger gaps. Europe was seen to be unable to have on-time decisions. They

are not good enough to convince the investors that they can work on and think about

good solutions.

In October, leaders agreed that the euro zones banks needed to add 100 billion

euros in new capital to assure the markets of their solidity. Banks would first be asked to

raise the funds themselves, and then individual governments would step in to make up

any shortfalls (http://topics.nytimes.com/top/reference/timestopics/subjects/e/european

_sovereign_debt_crisis/index.html).

After a lot of talks and meetings, big issues were still unanswered. There was no

assurance that banks are willing to give up 60 percent of their loans to Greece, rather than

the 20 percent previously suggested. Also, there was no clear idea on how to enhance the

effectiveness of the bailout plan.


22/40

22

Germany was in disagreement about the proposal that the bailout can be funded

by borrowing funds from the European Central Bank in order to calm the investors. It

believes that there should first be an agreement so that ECB can be a sort of lender of last

resort.

Other ideas included asking the International Monetary Fund for more assistance;

creating a separate fund linked to the stability fund that would be open to investors and

sovereign-wealth funds from outside Europe, like the Chinese, Indians and Brazilians, as

well as non-euro countries like Sweden and Norway, with a goal of amassing resources

of 750 billion to 1.25 trillion euros in all; and finding ways to use the stability fund asinsurance against partial losses that might be suffered by holders of sovereign bonds,

another way to get greater impact from the funds resources



On Oct. 27, European leaders announced a three-part plan: an effort to

recapitalize weak euro-zone banks, an increase in the size and scope of Europes main

rescue fund, and a proposal that banks take a 50 percent write-down on their Greek bonds



One of the big issues was answered. Banks agreed to give up 50 percent ofTheir

loans to Greek. But the success of the plan does not only rely to the banks decision. The

investors should also agree to the 50 percent loss so that the plan can be utilized. If the

investors disapproved the loss, then the plan will become default.


23/40

23

It is not the obligation of the investors to accept the loss. Also, IMF and ECB

were not also for the plan. This means that there is no assurance that the overall debt of

Greece will be let off.

In contrast to bank rescue plans in the United States and Britain, European

governments are not injecting funds directly into the banks. Instead they are asking that

banks significantly raise their capital level, to 9 percent by 2012



As for the banks which are terribly affected by and were part of the Europeandebt, it will be very hard to convince investors for additional investments. Most of the

target investors also lost from the recent US financial crisis, so there is a big possibility

that they will minimize the effect of European crisis on them.

Of course there is a possibility that the plan will be approved by concern people,

but another question about the sustainability of these obtained funds might arise. The

problem is already too big, and the planned solution might not be enough.

Effects of the European Debt Crisis in Neighboring Countries

Stock markets around the world rose after major central banks acted in concert to

lower borrowing costs, hoping to prevent a global credit crisis similar to the one that

followed the collapse of Lehman Brothers in 2008.

Japans Nikkei 225 index jumped 2.4 percent to 8,638.72. South Koreas Kospi

surged 4.2 percent to 1,925.17 and Hong Kongs Hang Seng vaulted 5.9 percent to

19,041.36. Benchmarks in Australia, India, Singapore and Taiwan all rose more than 2.5


24/40

24

percent. Mainland Chinese shares on benchmark indexes in Shanghai and Shenzhen rose

more than 3 percent.

The central banks of Europe, the US, Britain, Canada, Japan and Switzerland

reduced the rates that banks must pay to borrow dollars in order to make loans cheaper so

that banks can continue to operate smoothly.

The moves were cheered by markets as it shows central banks are willing to work

together to ease Europes sovereign debt crisis, Stan Shamu of IG Markets in Melbourne

said in a report.

Chinas central bank also acted to release money for lending and help shore upslowing growth by lowering bank reserve levels for the first time in three years. The

action signaled a key change in monetary policy, analysts said. I think the government

has the faith now that inflation has peaked, and that now its time to change the monetary

policy from a tight one to a loose one, said Francis Lun, managing director of Lyncean

Holdings in Hong Kong.

Worries about Europes financial systemand the reluctance of the European

Central Bank to intervene have caused borrowing rates for European nations to

skyrocket. Central banks will now make it cheaper for commercial banks in their

countries to borrow dollars, which is the dominant currency of trade. But it does little to

solve the underlying problem of mountains of government debt. Analysts said that unless

there is dramatic action at an upcoming summit of European leaders on the debt crisis,

markets are in for further shaky times.

Until we see some definitely agreed on and, when necessary, legislated

initiatives from Europe, optimism can be premature, said Ric Spooner, chief market


25/40

25

analyst at CMC Markets in Sydney. Until we see that sort of thing, there will be a

ceiling on the rally.

The central banks move sent the Dow Jones industrial average soaring 490

points, its biggest gain since March 2009 and the seventh-largest of all time. The Dow

rose 4.2 percent to close at 12,045. The Standard & Poors 500 closed up 4.3 percent at

1,247. The Nasdaq composite index closed up 4.2 percent at 2,620

(http://business.inquirer.net/33147/stocks-soar-on-joint-central-banks%E2%80%99-

action).

Effects of the European Debt-crisis in Philippine Businesses and Economy

The Bangko Sentral ng Pilipinas (BSP) kept policy rates steady, citing the need to

boost growth of the economy following its disappointing performance in the first three

quarters. With the decision of the central banks Monetary Board, key policy rates

remained at 4.5 percent for overnight borrowing and 6.5 percent for overnight lending.

Low interest rates help encourage individuals and corporate entities to borrow money,

thus fueling additional consumption and investments.

BSP Governor Amando Tetangco Jr. said the central bank could afford to

maintain interest rates at relatively low levels due to favorable inflation projections. He

said that even if rates were to remain low, the additional spending that could arise as a

result would not cause inflation to breach the ceiling set.

The Monetary Board believes that, on balance, the prevailing monetary policy settings

are appropriately calibrated for inflation and domestic economy activity, Tetangco said

in a press conference. Also, BSP Deputy Governor Diwa Guinigundo said that based on


26/40

26

the central banks latest estimates, inflation would likely average at 4.52 percent this

year, 3.51 percent next year, and 3.12 percent in 2013.

The governments inflation cap had been set at between 3 and 5 percent for this

year and the next two. The decision of the Monetary Board came after the government

announced that the economy, measured in terms of gross domestic product, grew by a

mere 3.2 percent in the third quarter from a year ago. This brought the average growth for

the first three quarters of the year to 3.6 percent, making the full-year growth target of

between 4.5 and 5.5 percent difficult to meet.

T

he National Economic and Development Authority admitted that the full-yeartarget could no longer be achieved given Septembers figures. The slower-than-expected

growth in the first three quarters was blamed on anemic global demand for exports due to

the crisis in the euro zone and the economies woes of the United States. The

governments lower-than-programmed expenditures also led to the poor growth figure in

September.

Budget officials said expenditures did not meet the programmed expenses because

of efforts to scrutinize spending proposals of line agencies with the aim of reducing

corruption.

But the government still expects the economy to perform better next year as it

vows to speed up public expenditures (http://business.inquirer.net/33155/bsp-sees-no-

need-to-reset-key-rates).

Christine O. Avendao of Philippine Inquirer stated in her article, P72B for poor,

infrastructure, Euro crisis cushion, thatPresident Benigno AquinoIIIprepared aP72.11

billion stimulation package, known as the Disbursement Acceleration Plan, which will be


27/40

27

fast-tracked to fortify the economy and cushion the impact of the global fallout from

Europes debt crisis.

As Pres. Aquino was speaking before the Foreign Correspondents Association of

the Philippines at the Mandarin Oriental Hotel in Makati City he acknowledged that

government spending had been running well behind target this year, which has been

blamed for the slower-than-expected growth in the first half of the year and lower GDP.

Also, he stated that the government would not fold under the weight of these

difficulties and instead we will excel.

He said that the stimulus package will make certain that we do what must bedone to maintain our economys momentum during the sluggish growth in the global

economy. We are not sure exactly what the negative effects of the world economic

turmoil will have on us since it is a developing story. But the P72.11 billion will have its

own multiplier effect and this pump-primes the economy to that extent, Mr. Aquino said

in his speech.

The stimulus package will be allocated to infrastructure and lessening poverty. A

breakdown of some of the planned expenditures under the stimulus package is stated

below:

y P10 billion to resettle and relocate informal settlers and families in dangerzones.

y P6.5 billion as support fund for local government units.y P5.5 billion for various infrastructure projects under the Department of

Public Works and Highways.

y P4.5 billion for the improvement of the Mass Rail Transit on EDSA.


28/40

28

y P1.868 billion for the upgrade of the Light Rail Transit.The criteria we used to choose these projects were simple. The stimulus will be

spent on projects that will have high macroeconomic impact and will help the poor,

Pres. Aquino said. The P37.92 billion amount of package will be released to national

government agencies, P7.25 billion to local government units and P26.90 billion to

government-owned or -controlled corporations (GOCCs) (http://business.inquirer.net/

24335/aquino-economic-stimulus-package-to-focus-on-infrastructure-poverty-

alleviation).

An article in the Philippine Star stated that the Philippine economy is nowfocused on investment-led growth and is no longer heavily dependent on the

remittances of Overseas Filipino workers, President Aquino said yesterday. The fact

that we are a little bit more insulated now points to the fact that we have more

investment-led growth rather than purely consumption resulting from OFW remittances,

Aquino said in an interview on the sidelines of the awarding ceremonies of the 2011

Bagong Bayani at Malacaang.

Gross domestic product grew 3.2 percent during the third quarter, below the

projection of state economic managers of a growth of between 3.8 percent and 4.8

percent. Aquino said this is because of the ripple effect of the global recession, natural

disasters and political turmoil in various parts of the world. He said this is precisely the

reason for the release of the P72 billion stimulus package last October. He noted that the

Philippine semi-conductor and automotive industries were affected by the production

shortfall in Japan when it experienced a nuclear crisis early this year.


29/40

29

Aquino said that compared to other economies, the Philippine economy remained

resilient and because of this, has received several credit upgrades. In the first half of the

year, international credit rating agencies Moodys Investors Service, Standard and Poors,

and Fitch Ratings raised their credit rating on the Philippines because of favorable

developments.

Aquino is optimistic that growth targets for this year and 2012 will be met.

Budget Secretary Butch Abad earlier said that P20 billion more may be added to the

stimulus package but Aquino did not confirm this (http://www.philstar.com/

Article.aspx?publicationSubCategoryId=66&articleId=754007).


30/40

30

SUMMARY

In October 2009, Prime Minister Papandreou announced that the previous Prime

Minister hid the real amount of Greeces ballooning deficit, creating the debt crisis.

Europe got into this mess when Greece took advantage of a situation where in Euro was

very strong and interest rates were very low. Greece, which made a lot of loans, had a

total of $400 debts as of that time.

Upon the revelation of the huge debt of Greece, the markets sent interest rates up.

Other European countries such as Spain, Portugal, and Ireland were also affected by this

problem.

In the early 2010, the European Union and the International Monetary Fund

worked together for a series of bailout packages for Greece that totaled 110 billion euros.

And in May, leaders approved a contingency fund of 500 billion euros for the union at

large.

Europe was not successful to calm the investors after the contingency fund. Thus,

in November, European officials arranged a bailout of 85 billion euros for Ireland. The

European Central Bank responded to the problem by buying large amounts of Italian and

Spanish bonds.

By September, the European leaders were increasingly discussing the creation of

a central financial authority with powers in areas like taxation, bond issuance and

budget approval that could eventually turn the euro zone into something resembling a

United States of Europe.


31/40

31

Europe was not successful in creating a calm atmosphere for the markets by

thinking about long-term solutions. The markets still believe that numerous banks in the

continent were very weak.

The deal reached in late July included $157 billion in new funds for Greece and a

modest reduction of its debt burden; private lenders saw their bonds rolled over into

longer maturities but also had them guaranteed. And the European Financial Stability

Facility, the euro zone rescue fund, saw its contingency fund grow to 440 billion euros, or

$632 billion, and was given new, amplified powers and the ability to use the money to

bail out Portugal and Ireland if necessary.The new package was again a failure. Interest rates in Italy and Spain were raised

by the investors. The lowered confidence of the investors might weaken the big banks in

those countries. Government bonds started to lose their value.

On Aug. 7, 2011, the European Central Bank said it would actively implement

its bond-buying program to address dysfunctional market segments.

On Aug. 16, 2011, Merkel and Sarkozy promised to take concrete steps toward a

closer political and economic union of the 17 countries that use the euro. They called for

each nation in the euro zone to enshrine a golden rule into their national constitutions

to work toward balanced budgets and debt reduction, a level of discipline well beyond the

current, oft-broken commitment. They also pledged to push for a new tax on financial

transactions, and for regular summit meetings of the zones members. They issued

collective bonds known as Eurobonds in order to help in the responsibility of their

government. They also disagreed with the planned increase in the bailout funds.


32/40

32

Despite the good intentions of Merkel and Sarkozy, numerous leaders opposed

their plan and discussed another plan which they think is more appropriate. They believe

that the suggestions of the two leaders might lead to the collapse of euro and more

conflicts associated with bailout issues.

Officials said a major overhaul of the way Europe conducts fiscal policy was

likely to take a long time and require changes in the treaties governing the euro. But they

pointed to the smaller changes that were already taking place as evidence that euro area

financial ministries see that they have little choice but to move together if they want to

avoid a catastrophic breakdown.Also in September, Greece pushed through a hugely unpopular property tax

increase as part of a new austerity package needed to keep installments of the first bailout

package flowing.

In October, leaders agreed that the euro zones banks needed to add 100 billion

euros in new capital to assure the markets of their solidity. Banks would first be asked to

raise the funds themselves, and then individual governments would step in to make up

any shortfalls.

Other ideas included asking the International Monetary Fund for more assistance;

creating a separate fund linked to the stability fund that would be open to investors and

sovereign-wealth funds from outside Europe, like the Chinese, Indians and Brazilians, as

well as non-euro countries like Sweden and Norway, with a goal of amassing resources

of 750 billion to 1.25 trillion euros in all; and finding ways to use the stability fund as

insurance against partial losses that might be suffered by holders of sovereign bonds,

another way to get greater impact from the funds resources.


33/40

33

On Oct. 27, European leaders announced a three-part plan: an effort to

recapitalize weak euro-zone banks, an increase in the size and scope of Europes main

rescue fund, and a proposal that banks take a 50 percent write-down on their Greek

bonds.

One of the big issues was answered. Banks agreed to give up 50 percent of their

loans to Greek. But the success of the plan does not only rely to the banks decision. The

investors should also agree to the 50 percent loss so that the plan can be utilized. If the

investors disapproved the loss, then the plan will become default.

In contrast to bank rescue plans in the United States and Britain, Europeangovernments are not injecting funds directly into the banks. Instead they are asking that

banks significantly raise their capital level, to 9 percent by 2012.

Of course there is a possibility that the plan will be approved by concern people,

but another question about the sustainability of these obtained funds might arise. The

problem is already too big, and the planned solution might not be enough.

The European crisis did not only affected European countries but also other

neighboring countries. Stock markets around the world rose after major central banks

acted in concert to lower borrowing costs, hoping to prevent a global credit crisis similar

to the one that followed the collapse of Lehman Brothers in 2008.

Japans Nikkei 225 index jumped 2.4 percent to 8,638.72. South Koreas Kospi

surged 4.2 percent to 1,925.17 and Hong Kongs Hang Seng vaulted 5.9 percent to

19,041.36. Benchmarks in Australia, India, Singapore and Taiwan all rose more than 2.5

percent. Mainland Chinese shares on benchmark indexes in Shanghai and Shenzhen rose

more than 3 percent.


34/40

34

The central banks of Europe, the US, Britain, Canada, Japan and Switzerland

reduced the rates that banks must pay to borrow dollars in order to make loans cheaper so

that banks can continue to operate smoothly.

Chinas central bank also acted to release money for lending and help shore up

slowing growth by lowering bank reserve levels for the first time in three years. The

action signaled a key change in monetary policy.

Worries about Europes financial systemand the reluctance of the European

Central Bank to intervene have caused borrowing rates for European nations to

skyrocket. Central banks will now make it cheaper for commercial banks in theircountries to borrow dollars, which is the dominant currency of trade. But it does little to

solve the underlying problem of mountains of government debt. Analysts said that unless

there is dramatic action at an upcoming summit of European leaders on the debt crisis,

markets are in for further shaky times.

The central banks move sent the Dow Jones industrial average soaring 490

points, its biggest gain since March 2009 and the seventh-largest of all time. The Dow

rose 4.2 percent to close at 12,045. The Standard & Poors 500 closed up 4.3 percent at

1,247. The Nasdaq composite index closed up 4.2 percent at 2,620.

Aside from Europes neighboring countries, the crisis also showed some effects

on the business and economy sector of the Philippines. The Bangko Sentral ng Pilipinas

(BSP) kept policy rates steady. Key policy rates remained at 4.5 percent for overnight

borrowing and 6.5 percent for overnight lending.


35/40

35

The central bank could afford to maintain interest rates at relatively low levels

due to favorable inflation projections. Even if rates were to remain low, the additional

spending that could arise as a result would not cause inflation to breach the ceiling set.

Based on the central banks latest estimates, inflation would likely average at 4.52

percent this year, 3.51 percent next year, and 3.12 percent in 2013.

The governments inflation cap had been set at between 3 and 5 percent for this

year and the next two. The economy, measured in terms of gross domestic product, grew

by a mere 3.2 percent in the third quarter from a year ago. This brought the average

growth for the first three quarters of the year to 3.6 percent, making the full-year growthtarget of between 4.5 and 5.5 percent difficult to meet.

According to Avendao, President Aquino III prepared a P72.11 billion

stimulation package, known as the Disbursement Acceleration Plan, which will be fast-

tracked to fortify the economy and cushion the impact of the global fallout from Europes

debt crisis.

The stimulus package will be allocated to infrastructure and lessening poverty. A

breakdown of some of the planned expenditures under the stimulus package is stated

below:

y P10 billion to resettle and relocate informal settlers and families in dangerzones.

y P6.5 billion as support fund for local government units.y P5.5 billion for various infrastructure projects under the Department of

Public Works and Highways.

y P4.5 billion for the improvement of the Mass Rail Transit on EDSA.


36/40

36

y P1.868 billion for the upgrade of the Light Rail Transit.The P37.92 billion amount of package will be released to national government

agencies, P7.25 billion to local government units and P26.90 billion to government-

owned or -controlled corporations (GOCCs).

Based on an article in the Philippine Star, domestic product grew 3.2 percent

during the third quarter, below the projection of state economic managers of a growth of

between 3.8 percent and 4.8 percent.

In the first half of the year, international credit rating agencies Moodys Investors

Service, Standard and Poors, and Fitch Ratings raised their credit rating on thePhilippines because of favorable developments.


37/40

37

CONCLUSION

The researchers conclude in the given data above that the Philippines is not

greatly affected by the European debt-crisis since the real effects are not yet determined.

The government however, is already moving but still, government spending remained

low for the past three quarters. The stimulation package will help increase the

government spending, therefore will increase GDP. The Philippines remain stable or if

not, a very little effect is felt. However, the demand for exports was lower because the

major importers of Philippine products were affected. Increase in lay-offs and

unemployment rate can happen due to bankruptcy and insolvency of some major

international companies.


38/40

38

RECOMMENDATION

The researchers recommend Philippine businesses to have independent sources of

raw materials and manage investments well. Also, employees must also find other

sources of income, so that they will not depend on international companies which most

probably are affected by this debt-crisis.

The authorities must also monitor changes in world economy to be able to

identify future problems accurately and act towards it accordingly. The Philippines must

also find more able countries to be alternative places to put our exports. The Philippines

must also increase its production of commodities so that even though the crisis happens,

other countries will still seek for our products and we will remain economically and

financially stable.

The Philippines must learn from this that an established monetary and fiscal

policy is important and must be well thought of. Although certain problems may always

arise, we must be prepared and have available solutions when it happens.


39/40

39

BIBLIOGRAPHY

Avendao, C. O. (October 13, 2011). P72B for Poor, Infrastructure, Euro Crisis Cushion.

Inquirer Business. Retrieved on December 1, 2011. Retrieved from:

http://business.inquirer.net/24335/aquino-economic-stimulus-package-to-focus-

on-infrastructure-poverty-alleviation

Barnes, H. (March 17, 2011). What are the Causes of the European Debt Crisis?.

Retrieved on December 2, 2011. Retrieved from:

http://www.ehow.com/info_8073152_causes-european-debt-crisis.html

BSP Sees No Need to Reset Key Rates. (December 1, 2011). Inquirer Business.


http://business.inquirer.net/33155/bsp-sees-no-need-to-reset-key-rates

European Debt Crisis. (December 5, 2011). The New York Times. Retrieved on

December 5, 2011. Retrieved from:

http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereig

n_debt_crisis/index.html

Fidler, S. (November 25, 2011). Options Dwindle for Euro Crisis. The Wall Street

Journal. Retrieved on December 1, 2011. Retrieved from:

http://online.wsj.com/article/SB1000142405297020445210457705837004961658

2.html

Foster, J. D. (September 23, 2011). The European Financial and Economic Crisis:

Origins, Taxonomy, and Implications for the U.S. Economy. The Heritage

Foundation. Retrieved on December1, 2011. Retrieved from:


40/40

http://www.heritage.org/Research/Testimony/2011/09/The-European-Financial-

and-Economic-Crisis-Origins-Taxonomy-and-Implications-for-the-US-Economy

Klein, E. & Kliff, S. (Dember 1, 2011). The European Debt Crisis in Eight Graphs. The

Washington Post. Retrieved on December 1, 2011. Retrieved from:

http://www.washingtonpost.com/blogs/ezra-klein/post/the-european-debt-crisis-

in-eight-graphs/2011/12/01/gIQAsmR5GO_blog.html

Porcalla, D. (December 2, 2011). Phl no longer dependent on OFW inflows - P-Noy.

PhilStar.com. retrieved on December 2, 2011. Retrieved from:

http://www.philstar.com/Article.aspx?publicationSubCategoryId=66&articleId=754007

Stocks Soar on Joint Central Banks Action. (December 1, 2011). Inquirer Business.


http://business.inquirer.net/33147/stocks-soar-on-joint-central-

banks%E2%80%99-action

Documents

European Debt Crisis 2011