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EUROZONE DEBT CRISIS
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What is the Eurozone Crisis ?
The European debt crisis is the shorthand term for Europe’s struggle to pay the debts it has built up in recent decades.
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A little History …
•In the year 1999 , Euro Currency was launched.•“Inspiration for the € symbol come from the Greek epsilon … crossed by two parallel lines … to ‘certify’ the stability of the euro. “•The idea was to Reduce trading costsBoost tourismSmooth the economy
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So what went wrong ?
Most governments run a budget deficit. (They Spent more than they earned)
Lack of strong political leadership in the past years has meant that the euro was not well supported by good fiscal and economic policies. We had 17 countries all behaving differently without any real central fiscal control to ensure that no country was spending more than it was earning. This was a recipe for disaster.
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Major debt ridden countries
Portugal
Spain
ItalyIreland
Greece
*Together called as PIIGS countries.
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Debt by Jan 2012
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A little Background …• Since joining the euro back in 1999, the governments of Greece and Portugal (among other offenders) have gotten used to spending a LOT of money. When times were good, it wasn't a problem — banks and other investors were willing to lend them money on the cheap and their public sectors became bloated.•When the financial crisis hit, however, problems came to a head. Debt levels in Portugal, Italy, and Greece became unsustainable, and taxes in a contracting economy are no longer enough to pay the bills.
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A little Background …
• Greece, Portugal, and Ireland are still struggling to bring their public debt under control, after receiving billions of euros in bailout aid from
I. the European Commission, II. the International Monetary Fund, and III. the European Central Bank
(the so-called troika)
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• These governments needed this money because it became too expensive for them to borrow cash on the open markets, with speculators demanding high rates for lending and traders even betting on a disorderly sovereign default.
• The initial round of aid money helped these governments prop up their banks and pay their bills.
• Ultimately, however, Greece needed even more money to prevent an economic collapse. EU leaders agreed in July 2011 that a "selective default" was the only option for Greece. Under this situation, euro area nations guaranteed payouts on Greek sovereign debt, and the country's private sector lenders agreed to take a loss — a "haircut" — on their debt holdings.
A little Background …
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The root cause of the problem !
If you think that the problem is about DEBT. No , its not just about the debt.Lenders need to believe that a country can repay its debt,Otherwise the interest rates soars,And borrowing becomes unaffordable And then the governments ask for emergency loans !
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Emergency loans taken by governments
• May 2010 , Greece 110 bn euros• Nov 2010 , Ireland 85 bn euros• May 2011, Portugal 78 bn euros• July 2011 , Greece (exact amount not
known)
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Things you should know about the Eurozone Crisis
Ireland was the first to falter
The Euro crisis has been rumbling on for a couple of years now as the number of countries being perceived as having a major debt problem has increased. Contrary to popular opinion, the first country to slide into crisis wasn't Greece but Ireland. Throughout the 1990s and 2000s, Ireland had a booming economy, but it relied on massive levels of personal debt and an overinflated housing market. So when the global financial crisis hit, the Irish were particularly hard hit. Housing prices plummeted and banks stopped lending. The country rapidly fell into recession and the government suddenly needed to borrow much more to keep going. Then the Irish government slashed public sector spending, but still couldn't pay its bills. As a result, the U.K. and wealthier members of the Eurozone have bought Irish government debt to help support the troubled Emerald Isle.
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Things you should know about the Eurozone Crisis
The power of the ratings agencies
Governments around the globe issue trillions of dollars of debt each year. This debt is bought by private investors, financial institutions and pension funds. But how do you know good government debt from bad? That is where credit agencies like Moody’s and Standard & Poor’s step in: They assess government debt for its safety and give it a rating (AAA being the safest while BBB is the weakest). Many have criticized the ratings agencies for being harsh on Eurozone countries as a strong economy like France recently lost its AAA rating.
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Things you should know about the Eurozone Crisis
The crisis could spread to the U.K.
As of this writing, the UK may be as a safe haven to international investors, but it may not last. In 2011, the U.K. government borrowed more than the Greece, and its economy is still sluggish. Meanwhile, the Eurozone accounts for the majority of Britain’s overseas trade and many British banks hold billions of government debt from Eurozone countries. As a result, Britain is threatened by the Eurozone crisis.
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Things you should know about the Eurozone Crisis
Greece’s problem is bigger than Euro membership
Nearly every economist has their own crazy story about the Greek economy (for example, there are only a handful of people registered as millionaires for tax purposes in Greece but 250,000 private swimming pools). Tax evasion and corruption in the public sector are endemic in Greece. The Greek government finds it impossible to collect the taxes that it needs to keep a lid on public spending. Membership to the Euro is preventing Greece from devaluing its currency to make exports cheaper and to increase tourism.
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Things you should know about the Eurozone Crisis
Germany is the key player in the Eurozone
With Europe’s biggest population, economy, and healthy government finances, Germany is the powerhouse of the Eurozone. No wonder, therefore, that other members of the Eurozone look to Germany for help. However, the German people back the continuation of the Euro, but they do not want to spend their hard earned money bailing out the weakest links in the Euro.
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Things you should know about the Eurozone Crisis
The global financial crisis helped cause the Eurozone’s current problems
The final cost of the global financial crisis of 2007 and 2008 has been estimated at $3 trillion. That’s a mind boggling sum and much of it was funded by governments around the globe borrowing in order to pump money into their banks, which were on the edge of collapse. At the same time, economies around the world fell into recession and tax revenues collapsed. A big financial black hole was created and it still hasn’t been filled — if anything it’s getting worse.
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Things you should know about the Eurozone Crisis
The global financial crisis helped cause the Eurozone’s current problems
The final cost of the global financial crisis of 2007 and 2008 has been estimated at $3 trillion. That’s a mind boggling sum and much of it was funded by governments around the globe borrowing in order to pump money into their banks, which were on the edge of collapse. At the same time, economies around the world fell into recession and tax revenues collapsed. A big financial black hole was created and it still hasn’t been filled — if anything it’s getting worse.
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Things you should know about the Eurozone Crisis
Debt levels in the U.S.A. and U.K. are higher than the Eurozone
Because of Britain and America’s addiction to credit cards and borrowing to buy property, personal debt levels are actually higher in these countries than the Eurozone. Your average French, Italian, and even Greek person are far less indebted than most Brits or Americans. This has prompted some observers to suggest that the ratings agencies got it wrong to give France a lower credit rating than the U.K.
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How will the Euro zone crisis impact India?
Capital flows into the economy and exports are likely to take a beating. Foreign institutional investor (FII) investment pattern is marked with high volatility. A sudden surge in investment pattern is as detrimental as an unannounced withdrawal. A surge in FII investments will lead to increased inflationary pressures and building of an asset bubble that could burst anytime.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.
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How will the Euro zone crisis impact India?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.The market volatility has compounded with the concerns of small investors. Sectors across the board including auto, oil and gas, metal, FMCG and healthcare took a beating. Concerns are the current European financial crisis will curb economic growth. The risk associated with otherwise favorite sectors such as banking has increased.
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