Soverign Debt Crisis- StockYard

8/8/2019 Soverign Debt Crisis- StockYard

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Sovereign Debt Crisis


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Sovereignty

It is the quality of having supreme,

independent authority over a territory.

It can be found in a power to rule and make

law that rests on a political fact for which no

purely legal explanation can be provided.


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Government Debt Government debt (also known as public debt, national debt)is money (or

credit) owed by any level of government; either central government, federal

government, municipal government or local government.

Debt of a sovereign government is called sovereign debt.

Government debt can be categorized as

Internal debt (owed to lenders within the country)

External debt (owed to foreign lenders)

Governments usually borrow by issuing securities, government bonds and bills.

Less creditworthy countries sometimes borrow directly from supranational

institutions.


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Risk free

Government bonds are theoretically risk-free

bonds

Governments can, up to a point, raise taxes,

reduce spending, or simply print more money

to redeem the bond at maturity.


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Really? Sovereign Risk

It is the probability that the government of a country(or an agency backed by the government) will refuse to

economically difficult or politically volatile times.

Although sovereign nations don't "go broke," they can

assert their independence in any manner they choose,and cannot be sued without their assent.


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Risk In practice, the market interest rate tends to be

different for debts of different countries.Example: Borrowing by different Eurozone countries

A po itica y unsta e state is anyt ing ut ris - ree as itmay, being sovereign, cease its payments

Spain in the 16th and 17th centuries nullified its

government debt 7 times during a century

Revolutionary Russia of 1917 refused to accept theresponsibility for Imperial Russia's foreign debt


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Sovereign Debt Rating

Assessment of the international rating

agencies on the likelihood that a particularcountry will default on its loans.


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Forms it can take Outright default domestic or external debt

Eg: Russia, Spain, Ecuador

Debt Restructuring

Eg: Pakistan (1999), Ukraine (2000), Uruguay (2003)

Bailout (solvent but illiquid)

Eg: Mexico (1994-95), Korea/Thailand (1997-1998)


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Peru Debt Crisis


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Peru Debt Crisis

In 1980s the living standard of Peruvian

people was unbearable due to TWO reasons -

??


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Reasons

1. Unmanageable Debts

2. Hyper inflation


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Phases that led to CrisisExport led economy ofBelaunde

Administration took over by

Alvarado

De privatized many

aspects of economy

IMPORT SUBSITUTE

INDUSTRALIZATION

Led to heavy

BORROWING

More DEBT than

before


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Phases that led to Crisis : continued

Oil Crisis of 1973 Topped

the economic problem Inflation began in PeruAgricultural

industry Failed

Increased

overnment

In 1980 ,

Belaunde tookPrivatize 2/3 th

spending has ledto more Debts

over Alvarado

Money comes to

the Elite People

not to the poor

people

Belaunde policies

were on the edgeto work BUT ????

Suddenly Peru

suffered with the

NATURALDISASTERS LIKE

earthquakes in

1983


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Phases that led to Crisis : continued

Major exports,

potatoes &

sugar got

devastated

Per capita GDP

was reducedfrom $2,569

to$2.443

When Peru tookthe money from

IMF ?

Perubecome

RISKEST for

investors

In 1985,inflation

increased

further

Popularity of

GUERILLA group and

weak economy further

led to inflation

In 1991, after the

FUGIMORI government,

the condition become

little stable


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Argentine Debt Crisis


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Argentina Debt Crisis

Argentina's current economic crisis coming for along time, with economy worsened during currentgovernment's two years in power.

The country has been in recession for four years .

Situation is deteriorating fearing, it could default on its

90bn public debt and the currency may need to bedevalued.


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Timeline 1916 - Hipolito Yrigoyen of the Radical party is

elected president. He introduces a minimum wage tocounter the effects of inflation

1939 - Outbreak of World War II. Argentina proclaimsits neutrality.

From 1939 to 1998 ,there exist a lot of politicalinstability in Argentina (change in power)


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Recession Bites . . 1999 - Fernando de la Rua of the centre-left Alianza

opposition coalition wins the presidency, inherits 114billion-dollar public debt.

2000 - Strikes and fuel tax rotests

Beef exports slump after an outbreak of foot-and-mouth disease

The IMF grants Argentina an aid package ofnearly 40 billion dollars.


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2001 July - Much of the country is brought to a

standstill by a general strike in protest againstproposed government spending cuts

Return of the Peronists

2001 October - The opposition Peronists take

control of both houses of parliament inCongressional elections.


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Within days the government devalues the peso, ending10 years of parity with the US dollar

Banking and foreign exchange activity suspended

2002 November - Argentina defaults on an $800mdebt repayment to the World Bank, having failed to re-secure IMF aid. The World Bank says it will not considernew loans for the country

2003 September - After weeks of negotiations Argentinaand IMF agree on debt-refinancing deal


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2003 September - After weeks of negotiations

Argentina and IMF agree on debt-refinancingdeal under which Argentina will only pay intereston its loans.

2005 March - President Kirchner declares therestructuring of the country's debt to be asuccess

2006 January - Argentina repays its multi-billion-dollar debt to the IMF.


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Dubai Debt Crisis


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The Country

UAE consists of seven states (emirates)

Abu Dhabi, Dubai, Sharajah, Ajman, Ummal -Quwain, Rasal Khaimah and Fujairah


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Dubai World Vice President and Prime Minister of UAE and ruler of

Dubai - Sheikh Md bin Rashid Al Maktoum, holds the

majority stake in the company

An investment company that manages and supervises a

Promotes Dubai as a hub for commerce and trading

It is Emirates flag bearer in global investment

Plays a central role in the direction of Dubai economy.


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Assets of Dubai World Dubai Ports World

Jafza Nakheel

Tejari

Limitless Leisurecorp

Maritime City

Dubai Multi

Commodities Centre

Island Global Yachting

Inchcape Shipping

Services


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What Happened . . Dubai let its whole economy to rest on a single

sector i.e. real estate sector.

The property bubble which was created during

2005-2007, went bust because of the financialcrisis that engulfed almost the entire world.

Dubai fell victim even with massive levels ofgovernment involvement in its real estate sector.


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What Happened . .

By 2009, Dubai had debts amounting to $80 bn of whichDubai Worlds share was a staggering $59 bn.


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What Happened . .

The Dubai Government announced that the companywould delay all maturing payments to May 2010.

This raised risk of the largest government default since thergent ne e t restructur ng o .

Moodys and S&P immediately heavily downgraded thedebt of various government related entities.

Major stock exchange reacted immediately. Banking stocksled the tumble.


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What Happened . . On Dec 1, officials in UAE intervened by bringing

to notice that Dubai World was seeking tonegotiate only the$26 bn in obligations held byNakheel (its troubled real estate developer)

On Dec 14, Islamic bonds of Nakheel amountingto $4.1 bn were maturing

On the same day Dubai Govt received $10 bn insurprise aid from Abu Dhabi for debt laden DubaiWorld.


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What Happened . .

On May 2010, Dubai World had drawn an agreementwith most of its lender banks to restructure debts

worth $23.5 bn.


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European Financial Crisis


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Euro convergence criteria (also known as theMaastricht treaty)

Main criteria to enter the Eurozone (European

Conditions for entering into Eurozone

Inflation rates Government finance

Exchange rate

Long term interest rates

The purpose of setting the criteria is to maintain theprice stability within the Eurozone even with the

inclusion of new member states.


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Maastricht Treaty Inflation rates: No more than 1.5% higher than the

average of the three best performing (lowest inflation)

member states of the EU.

Government finance:

Annual government deficit: Annual government deficit toGDP must be less than 3% at the end of the precedingfiscal year.

Government debt: Gross government debt to GDP mustbe less than 60% at the end of the preceding fiscal year.


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Maastricht Treaty Exchange rate: should have joined ERM and

should not have devalued its currency for 2consecutive years.

Long-term interest rates: Long-term interest

rate must not be more than 2% higher than in

the three lowest inflation member states.


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Regulators of Eurozone

European Central Bank (ECB)

European commission


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The definition and implementation of monetary policy forthe euro area.

The conduct of foreign exchange operations.

ECB Powers

The holding and management of the official foreignreserves of the euro area countries (portfoliomanagement).

The promotion of the smooth operation of paymentsystems.

The ECB has the exclusive right to authorise the issuance of

banknotes within the euro area.


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As of Jan 19991. Austria

2. Finland

7. Italy

8. LUXEMBOURG

. e g um

4. France

5. Germany

6. Ireland

.

10. PORTUGAL

11. SPAIN


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By 200812. Greece -2000

13. Slovenia-2006

14. Cyprus-2007

15. Malta-2007

16. Slovekia - 2008


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PORTUGAL

IRELAND

Countries affected:

ITALY

GREECE

SPAIN


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If a country has its own currency, it can print it

according to its gold deposits and as per theprevailing needs of the economy.

Default by stealth

But as Greece was a part of the European Union,it could not print current as per its whims.

This led to cascading of its debts as it could neverprint enough currency to meet its obligations.


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WHY GREECE?

The Miniscule Greece


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The Miniscule Greece...


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So what if Greece defaults? Bank Runs

Sudden-stop to capital Inflows Firms and Banks in sibling countries- Capital

mar et access.

The Europe Inter Bank Market

The rest is history

Even Spiderman wont find the way out


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Even Spiderman won t find the way out

Th ( i bl ) d b


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The current (unsustainable) debt

levels!

So, when did it start?

Before joining Eurozone.

.

Impact of Global Recession.


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New government, New Deficits Change of government : George Papandreou

New deficit figures, from 6 % to 12.7 % to GDP.

Accumulated government debt is forecasted

at 120 % by 2010.


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The ratings fell! ! ! Who are Rating agencies?

Why do we need them?

How do they measure sovereign risk?

Determinants of Sovereign rating


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Per capita income : GNP per capita

GDP growth : Average annual real GDP growthon a year-over-year basis

n at on: verage annua consumer pr ce

inflation rate

Fiscal balance : Average annual central

government budget surplus relative to GDP



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External balance: Average annual current

account surplus relative to GDP Indicator for economic development: IMF

Indicator for default history : Default on

foreign currency debt


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Judging the Judges

Total Debt Levels


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259 %259 %

466 %466 %

322 %322 %

286 %286 %

71 %71 %

158 %158 %

366 %366 % 315 %315 %

129 %129 %

471 %471 %

144 %144 %


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Goldman Sachs How does it makes money ?

The CEO says that they are Doing Gods

or

Is it really only an Investment Bank?


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Role of Speculators

Betting against theEuro.

Credit default swaps

on Greek debt


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The timeline of Greek Crisis


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IMF and EU Rescue package


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IMF and EU Rescue package

European Financial Stability Facility

Euro 440 billion from 27 Euro area memberstates

t ona uro on y .

And Up to Euro 250 billion by the IMF.

IMF: an unwarranted favor


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IMF: an unwarranted favor

IMF resources raised for low and middle

income countries Greeces problem is European

e was create to ea on y w t a ance

of payments problems.

Disciplining Greece

Interest subsidy

Greek Domestic policy Response


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Stability and Growth Programme

Fiscal Austerity:

Target to cut deficit from an estimated 13.6% of GDP

in 2009 to below 3% by 2012.

Hiked taxes on fuel, tobacco and alcohol, raised the

retirement age by two years, imposed public sector

pay cuts and applied tough new tax evasion

regulations.



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Structural Reforms

Wide-ranging reforms to the pension and health caresystems and to Greeces public administration.

competitiveness by enhancing employment andeconomic growth, fostering increased private sector

development, and supporting research, technology,

and innovation.

Broader Implications of Greeces


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Crisis

Contagion

Complex Financial Instruments and Financial

Regulation

European Integration

The impact on Euro.


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Documents

Soverign Debt Crisis- StockYard