World Trade Crisis

BY:

Saurav Kumar-79

Souvik Banerjee- 85

Krishangi Kakati-110

EUROZONE DEBT CRISIS

What is the Eurozone Debt Crisis?

This is also known as Eurozone sovereign debt crisis

The term indicates the financial woes caused due to overspending by come European countries

When a nation lives beyond its means by borrowing heavily and spending freely, there comes a point when it cannot manage its financial situation.

When that country faces insolvency. (Insolvency: when it is unable to repay its debts and lenders start demanding higher interest rates, the cornered nation begins to get swallowed up by what is known as the Sovereign Debt Crisis

What are the causes of a debt crisis?

What causes a debt crisis to occur are a stopped or slowed economic growth, declined tax revenues, increased government spending, or a combination of the factors.

Brief History

The Eurozone debt crisis seems to surround Greece the most.

The actual beginning is how the European Union (EU) began in 1993 where 27 European nations "agreed to form an alliance that could compete economically with larger nations such as the US". This is what created the currency of the euro.

The euro's value has decreased over the past few years due to the European Debt Crisis.

Brief History The EDC began in 2008 with the crash of Iceland’s banking system, which spread to Greece.

Greece had experienced corruption and spending as its government continued borrowing money despite not being able to produce sufficient income through work and goods.

It was admitted that Greece's debts had reached 300bn euros, the highest in modern history

Spain, Portugal, and the other nations later followed Greece.

Data Collection COUNTRIES STATISTICS

France Debt/G.D.P: 81.7% Unemployment. Oct 2011: 9.8% S&P Rating: AAA

Germany Debt/G.D.P: 83.2% Unemployment. Oct 2011: 5.5% S&P Rating: AAA

Greece Debt/G.D.P: 142.8% Unemployment. July 2011: 18.3% S&P Rating: CC

Italy Debt/G.D.P: 119% Unemployment. Oct 2011: 8.5% S&P Rating: A

Portugal Debt/G.D.P: 93% Unemployment. Oct 2011: 12.9% S&P Rating: BBB-

Spain Debt/G.D.P: 60.1% Unemployment. Oct 2011: 22.8% S&P Rating: AA

The main European countries

affected in the European Debt

Crisis are as follows:

Latest Developments

PORTUGAL • In the first quarter of 2010 Portugal had one of the best

rates of economic recovery in the EU. The country matched or even surpassed its neighbors in Western Europe.

• A report was released that the Portuguese government public debt has increased due to mismanaged structural and cohesion funds which then resulted to the verge of bankruptcy of the country.

• Bonuses and wages of head officers also resulted to their economic situation

Latest Developments • May 16 2011- Eurozone leaders officially approved a €78

billion bailout package for Portugal, which became the third Eurozone country, after Ireland and Greece, to receive emergency funds.

• According to the Portuguese finance minister, the average interest rate on the bailout loan is expected to be 5.1 percent

• As part of the deal, the country agreed to cut its budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012 and 3 percent in 2013.

Latest Developments

• The Portuguese government also agreed to eliminate its golden share in Portugal Telecom to pave the way for privatization

• July 6 2011- Rating’s agency Moody had cut Portugal’s credit rating to junk status

• December 2011- it was reported that Portugal's estimated budget deficit of 4.5 percent in 2011 will be substantially lower than expected, due to a one-off transfer of pension funds. This way the country will meet its 2012 target already a year earlier.

Latest Developments

SPAIN • The country's public debt relative to GDP in 2010 was

only 60%

• Spain's public debt was approximately U.S. $820 billion in 2010

• As one of the largest euro zone economies the condition of Spain's economy is of particular concern to international observers, and faced pressure from the United States, the IMF, other European countries and the European Commission to cut its deficit more aggressively

Latest Developments

• May 2010- Spain announces the new austerity measures designed to further reduce the country's budget deficit, in order to signal financial markets that it was safe to invest in the country

• Spain succeeded in minimizing its deficit from 11.2% of GDP in 2009 to 9.2% in 2010 and around 6% in 2011

• To build up additional trust in the financial markets, the government amended the Spanish Constitution in 2011 to require a balanced budget at both the national and regional level by 2020.

• The amendment states that public debt cannot exceed 60% of GDP, though exceptions would be made in case of a natural catastrophe, economic recession or other emergencies.

Latest Developments GREECE • October 4 2009-With the new president, Papandreou • November 5 2009-Greece reveals that their budget deficit is

1207 percent of GDP • December 8 2009- Greece's long-term debt to BBB+, from

A-. • March 3 2010- Greece tries to persuade the financial market

that they can repay their debts • April 23 2010- Papandreou asks help from International

Monetary Fund after Greece is priced out of the international bond markets.

• May 2 2010- European finance ministers lend €110bn which covers until 2013. Greece pledges to bring its budget deficit into line, through unprecedented budget cuts.

Latest Developments April 17 2011- Greek borrowing costs start rising sharply again, on fears that its austerity measures are failing to work. Greece is now deep in recession.

June 19 2011- Admits that they need to borrow money again

June 29, 2011- EU leaders agree on €109bn bailout – which will see private sector lenders take haircuts of 20% – and extension to the European Financial Stability Facility (EFSF).

October 27 2011- Europe leaders agree new deals that slash Greek debt and increase the firepower of the main bailout fund to around €1 trillion.

November 6 2011- Prime Minister resigns

Impact on the local economy

The Eurozone debt crisis impacted market sentiment.

The country’s economic condition will remain sound—able to withstand the effects of the lingering debt crisis in Europe and uncertainties in the United States

―2012 will be a tough one, with reduced global growth outlook due to global uncertainties.‖

Trouble abroad curbed the country’s economic growth last year and dampened the market. The debt crisis in the euro zone rattled investors and heightened demand for safe haven and assets such as US dollars and bonds.

Remedial Measures

Emergency loans have been extended as bailouts mainly by stronger economies like France and Germany, as also by the IMF.

The EU member states have also created the European Financial Stability Facility (EFSF) to provide emergency loans.

Restructuring of the debt

Austerity measures have been enforced.

OVERVIEW

The recession began in the United States in December 2007 and became

international in September 2008 and is still ongoing.

US mortgage-backed securities, which had risks that were hard to assess,

were marketed around the world.

A more broad based credit boom fed a global speculative ripple in real

estate and equities, which served to reinforce the risky lending practices.

The bad financial situation was made more difficult by a sharp increase

in oil and food prices.

The emergence of sub-prime loan losses in 2007 began the crisis and

exposed other risky loans and over-inflated asset prices.

With loan losses mounting and the fall of Lehman Brothers on September

15, 2008, a major panic broke out on the inter-bank loan market.

As share and housing prices declined, many large and well

established investment and commercial banks in the United

States and Europe suffered huge losses and even faced

bankruptcy, resulting in massive public financial assistance.

A global recession has resulted in a sharp drop

in international trade, rising unemployment and slumping

commodity prices.

US FINANCIAL CRISIS 2007-08: AT A GLANCE

HOUSE PRICE CHANGE

Housing prices were relatively stable during the 1990s, but they began to

rise toward the end of the decade.

Between January 2002 and mid-year 2006, housing prices increased by a

whopping 87 percent.

The boom had turned to a bust, and the housing price declines continued

throughout 2007 and 2008.

By the third quarter of 2008, housing prices were approximately 25

percent below their 2006 peak.

THE DEFAULT RATE

The default rate fluctuated, within a narrow range, around 2 percent

prior to 2006.

It increased only slightly during the recessions of 1982, 1990, and

2001.

The rate began increasing sharply during the second half of 2006

It reached 5.2 percent during the third quarter of 2008.

STOCK MARKET RETURNS As of mid-December of 2008, stock returns were down by 37 percent since the beginning of the year.

This is nearly twice the magnitude of any year since 1950.

This collapse eroded the wealth and endangered the retirement savings of many

Americans.

CAUSES

Imprudent Mortgage Lending

Against a backdrop of abundant credit, low interest rates,

and rising house prices, lending standards were relaxed to the

point that many people were able to buy houses they couldn’t

afford. When prices began to fall and loans started going bad,

there was a severe shock to the financial system.

Housing Bubble

With its easy money policies, the Federal Reserve allowed

housing prices to rise to unsustainable levels. The crisis was

triggered by the bubble bursting, as it was bound to do.

Global Imbalances

Global financial flows have been characterized in recent years by

an unsustainable pattern: some countries run large surpluses

every year, while others run deficits.

Securitization

Mortgage loans that were not securitized.

Lack of Transparency and Accountability in Mortgage

Finance

Shadow Banking System

Risky financial activities confined to regulated banks (use

of leverage, borrowing short-term to lend long, etc.) migrated

outside the explicit government safety net provided by deposit

insurance and safety and soundness regulation. Mortgage lending,

in particular, moved out of banks into unregulated

institutions.This unsupervised risk-taking amounted to a financial

house of cards.

EFFECTS

Effect on the U.S

In the U.S., persistent high unemployment remains as of December 2012, along with low consumer confidence, the continuing decline in home values and increase in foreclosures and personal bankruptcies, an increasing federal debt, inflation, and rising petroleum and food prices.

Real gross domestic product (GDP) began contracting in the third quarter of 2008 and did not return to growth until Q1 2010. It is projected that GDP would not return to its potential level until 2017.

The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late 2009, then steadily declined to 7.6% by March 2013.

Residential private investment (mainly housing) fell from its 2006 pre-crisis peak of $800 billion, to $400 billion by mid-2009 and has remained depressed at that level.

Housing prices fell approximately 30% on average from their

mid-2006 peak to mid-2009 and remained at approximately

that level as of March 2013.

Stock market prices fell 57% from their October 2007.Stock

prices returned to record levels by April 2013.

U.S. total national debt rose from 66% GDP in 2008 pre-

crisis to over 103% by the end of 2012.

PROJECTION FOR FUTURE

Absent legislative action, large spending cuts and large tax increases will hit the economy at the same time, causing a total fiscal contraction of $500 billion, or about 3.2 percent of GDP.

This will result in the ―double whammy‖ effect.

Washington’s failure to address the pending fiscal cliff is already having an impact, cutting 0.6 percentage points from GDP growth for 2012.

The worst could be ahead. If the fiscal contraction happens, the economy will almost certainly experience a recession in 2013 and significantly slower growth through 2014.

From 2012 to 2015, the economy will lose 12.8 percent of the average annual real GDP it could have attained with moderate growth, sapping critical resources from all economic sectors.

Job losses will be dramatic. By 2014, the fiscal contraction

will result in almost 6 million jobs lost, and the

unemployment rate could reach more than 11 percent.

Households will take a big hit. Real personal disposable

income will drop almost 10 percent by 2015.

Manufacturers of consumer goods and defense contractors

likely will see large and durable contractions in their

industries.

It will take most of the decade for economic activity and

employment levels to recover from the fiscal shock. Another

recession could deal a substantial blow to long-term

economic potential, permanently reducing living standards in

the United States.