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8/3/2019 European Debt Crisis 2011
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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
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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
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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.
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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).
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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
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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.
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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
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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
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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
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week (http://online.wsj.com/article/SB10001424052970204452104577058370049616582
.html).
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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?
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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.
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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).
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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).
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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.
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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
(http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt
_crisis/index.html).
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
/timestopics/subjects/e/european_sovereign_debt_crisis/index.html).
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
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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.
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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
(http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt
_crisis/index.html).
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
(http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt
_crisis/index.html).
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
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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
/timestopics/subjects/e/european_sovereign_debt_crisis/index.html).
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
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(http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt
_crisis/index.html).
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
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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
(http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt
_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.
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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
(http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt
_crisis/index.html).
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
(http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt
_crisis/index.html).
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.
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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
(http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt
_crisis/index.html).
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
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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
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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
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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
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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.
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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.
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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).
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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BIBLIOGRAPHY
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on-infrastructure-poverty-alleviation
Barnes, H. (March 17, 2011). What are the Causes of the European Debt Crisis?.
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Foster, J. D. (September 23, 2011). The European Financial and Economic Crisis:
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Porcalla, D. (December 2, 2011). Phl no longer dependent on OFW inflows - P-Noy.
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