European Financial Crisis.pdf

7/27/2019 European Financial Crisis.pdf

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European Financial Crisis


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Agenda

Genesis

Sub-Prime CrisisContagion Effect

European Financial Crisis IcelandPrincipal Actors PIIGS

Current Status

Future Scenario


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Genesis

EUEconomic & Political Union of 27 member states Free movement of people, goods, services & capital

Schengen Free movement Abolition of passport controls

Treaty of Maastricht 1st Nov 1993

Salient Features

Common Currency - Euro EMU

SGP - Stability & Growth PactConvergence Criteria Article 121

Inflation; Deficit & Debt; Interest rates

Fiscal Monitoring of members

Article 122 EC can take measures to help an ailing country


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Sub-Prime Crisis

Sub-Prime loansHousing Bubble Fuelled by Low interest rates Supply Glut Foreclosures

MBS

CDSFailure of Banks Credit Crunch Reduced Output Unemployment

Government Bail-outs Stimulus Packages Fannie Mae and Freddie Mac

Keynesian model adopted Deficit Spending

Contagion effect Global linkages


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European Financial Crisis


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Principal Actors - Iceland

Pre 1990s

Natural resources Tourism Fiords, Glaciers and Geysers

Fishing Salted Cod

David Oddsson

Mayor of Reykjavik

Prime Minister in 1991

Promised to end the boom and bust cycles based on Fish catch

Privatization - $2Bn Privatized banking industry

Thrust on

Biotechnology

Software


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Banking Tapped Overseas markets

Landbanski Icesave Scheme High interest rates

Banking accounted for 75% of stock market

Kaupthing Bank

Assets 208Bn Krn in 2000 6600Bn Krn in 2008 Loans & Assets were 10 times Iceland GDP

High inflows Strong kronor

Consumption led economy

Global Financial Crisis large scale outflow of funds Haarde in US for assistance

Central bank had 2Bn Loans were 70Bn

Defaults by Glitner bank 600Mn

Govt. bailout for Glitner Landsbanski - Kaupthing

Principal Actors - Iceland


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Socialist country Deficit 8.3% of GDP

Foreign Liabilities 108% Spain 91% ; Greece 87%

Weak economy suffering from early dictatorial regimes High Public Debt

Steps Taken Increase in Taxes Shoring up Govt. revenues

Cut spending on defence and infra projects Privatization State schemes to guarantee Credit institutions - 20Bn Guarantees to depositors - 100000

Principal Actors - Portugal


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Economic Transformation in the 90s

Low Taxes Educated workforce Entry of MNCs

Bridge between US and Europe

GDP Growth rate of 6.5%

Housing Boom

Cheap Loans Tax Incentives House prices increased 3 fold in 10 yrs

40% of houses built in 1996-2006

Housing Bubble Over Supply

Speculative nature of demand

Not of the Sub-prime variety of the US

Multi unit loans to property developers with sub-prime characteristics

Principal Actors - Ireland


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Cause Huge spending Deficit Budgets

Cheap lending Lack of financial reform

Government cooking the accounts

Effect 300 billion Debt

Budget Deficit 12.7%

Violation of Growth & Stability Pact

Credit Rating downgraded

Principal Actors - Greece


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Steps Taken/To be taken Cut in spending

Austerity measures

Increase in Taxes

Better Tax collection

Public Sector Pay cuts Increase in retirement age by 2 yrs

Fears Civil Unrest Sovereign Debt default

Euro under pressure

Principal Actors - Greece


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GDP contracted in 2008 Construction Sector 10% of GDP

Housing Bubble Price increases of more than 200%

Bubble started in 1995 and sustained till 2007

28% of houses vacant

Fuelled by tax incentives similar to India

High indebtedness

High Inflation

High Oil pricesHigh Interest Rates pricks the bubble Large scale unemployment ~ 25-30%

Severe pressure on Banking system

Principal Actors - Spain


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Current Status

Greece

Austerity measures

Looking for a bail-out

Germany against such a bailout France in favour

Portugal

Govt. trying to raise money to prop up banking system

Failed Bond Auction to raise 500Mn

Spain & Ireland

Reduce fiscal deficit

Rollback Keynesian debt fuelled monetary policies


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Future Scenario

Sovereign Debt Crisis looms

Euro under threat

The concept of United States of Europe in grave dangerPolitical Union of Europe unlikely

Issues of Solidarity & Responsibility

Return to Non-Keynesian policies can further deflatethe economiesDouble Dip recession possible

Common Fiscal Policy for the EU Two Solutions EMF Fund for Bailouts

European Treasury Single authority for Tax policy

Govt. Spending


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Readings

http://bx.businessweek.com/european-financial-crisis/view?url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB12303266006

0735767.html%3Fmod%3Drss_whats_news_us

http://bx.businessweek.com/european-financial-crisis/

http://www.2000wave.com/article.asp?id=mwo021910

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

http://www.iflr.com/Article/2324178/Portugal-Restoring-confidence.html

More on the GDPI Briefcase


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Questions & (Hopefully) answers!


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Annexures


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Foreclosures


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Sub-Prime Vicious Cycle


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How the Cookie Crumbled


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Geyser Economy


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PIIGS

Used to refer to thesouthern Eurozone

troubled economies ofPortugal

Ireland

ItalyGreece

Spain

Derogatory term


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Gross Public Debt


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European Union

Pop - 500 Mn

GDP - $18TnBiggest in the world

30% of total world

outputCommon Currency

2nd most preferred

reserve currency 25% of all Forex holdings


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Belief in God

Documents

European Financial Crisis.pdf