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Presented by:

Akshay BalujaAnkit RathiAkshay RatheeAnuj KathpaliaAnuj Sharma

Dheeraj Jain

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Transmission from the United States

Housing Price Bubble and Collapse

Financial Market Freeze and Collapse

Policy Response Support for Financial Sector

Monetary Policy

Fiscal Policy Effect of the Euro Currency Zone

Greeces Problems

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US Housing Bubble created by Low interest rates

Lax regulation of sub-prime mortgages with

adjustable rates, two year teaser rates Securitization of mortgages, sold to unwary buyers

as highly rated

US Bubble popped when Interest rates rose in 2006, housing prices fell Subprime mortgages and securities defaulted

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US Housing Prices peaked in late 2006

European Housing Prices peaked a year later

Financial Crisis struck Europe & US at same

time, August 2007, after Bear, Stearns, FannieMae & Freddie Mac taken over with USGovernment assistance in April and July of 2007

International credit markets froze up in August

2007 when subprime based hedge fundscollapsed in Europe and US. No longer able toborrow short-term funds, banks faced muchhigher risk premia

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Subprime Debt Obligations made in USA held aroundthe world caused global financial shock.

Housing bubbles burst in UK , Ireland, Spain as wellas US.

Failure of Lehman Bros in September 2007 causedmassive panic over counterparty risk. AIG required$180 billion bailout to cover Credit Default Swaps,insurance against bond defaults underwritten withoutreserves.

Stress on banks around the world led to shrinking

credit availability. Shadow off-balance-sheetbanking sector collapsed as short-term fundingvanished.

Falling demand spread from US to all countries; as USimports dropped, other countries exports fell.

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BNP-Paribas forced to close funds in August 2007

UK bank Northern Rock taken over by government

German state banks IKB, WestLB, BayernLB and

SachsenLB bailed out by government Irish banks given government deposit guarantees

Switzerland injects funds into UBS

Icelands banks unable to roll over short termborrowing, default on deposits of foreigners

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ECB injected liquidity into European banksunable to obtain short-term funds in market.

Federal Reserve used Euro-dollar swaps to

make dollars available to ECB to lend to banks. ECB did not lower interest rates until October

2008 because of its focus on inflation.

Euro fell against the dollar due to safe havenflight to US Treasury securities.

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TARP and Federal Reserve programs in US

National programs in European countries, dueto absence of Eurozone-wide regulator.

Beggar-thy-neighbor effect, as first Irelandgave deposit guarantees, then UK, thenNetherlands, to avoid bank deposit flight.

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Automatic Stabilizers of falling taxes, risingwelfare and unemployment payments kick inas incomes fall and unemployment rises.

Discretionary Fiscal Stimulus enacted in mostcountries, depending on their fiscal positions.

European countries limited by Stability andGrowth Pact to 3% fiscal deficits, except in timeof exceptional economic distress.

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Previous economic crises in Europe have led tolarge devaluations of currencies.

Within eurozone, single currency prevents

devaluation , provides automatic financialsupport through capital markets.

Non-euro currencies depreciated sharply in2008, British pound sterling, Swedish kronor,Polish zloty, Hungarian forint.

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Since joining the euro, Greece has had higherinflation than other Eurozone members.

Greece has also increased debt faster than others

to finance generous public sector pay, welfare,and retirement benefits, while collecting a lowershare in taxes due to widespread tax evasion.

As a result, Greek goods have become

increasingly expensive and uncompetitive,causing loss of market share and furtherreducing revenues.

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80

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120

1999

2000

2001

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2005

2006

2007

2008

Germany

Greece

Spain

France

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Greek debt/GDP ratio reached 113% and deficit/GDPratio reached 12.7% in 2009.

Foreign bondholders became doubtful that Greececould continue to roll over its increasing debt, forced

interest rates higher. EU faced choice between Greek default and bailout

with tough conditions.

IMF and EU agreed to lend Greece up to $146 billion

over three years. Greece to increase sales taxes, reduce public sector

salaries, pensions, eliminate bonuses.

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Cautious Eurozone response to Financial Crisis Interest rate policy reaction delayed: concentration on

inflation target Fiscal policy reaction muted: Stability & Growth Pact

Common currency members avoided largedevaluations and foreign currency debt.

European governments have tried to act together,not always successfully.

Limited impact of falling exports due to extensiveinternal trade relationships.

Greece facing difficult adjustment problems,European banks avoiding losses on Greek bonds.