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U.S. and European Debt Crises

Lim Mah-Hui October 19, 2011

PwC SeminarPenang

Debt Profile of Spain, Portugal, Greece, 2009

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Spanish Debt by Sector of Issuer, % of Total, 1995 – 2009

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Portuguese Debt by Sector of Issuer, % Total, 1998 - 2009

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Greek Debt by Sector of Issuer, % of Total, 1997 -2009

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Sovereign Debt Crisis OR Banking Crisis ?

Similarities and links btw Global Finance Crisis & European Crisis

Both are banking crises European Crisis is Act II of the Global

Financial Crisis

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Global Financial Crisis U.S. economy growth slowed after 1970s Growth supported by economy taking on

more debt > debt driven economy Financial debt grew fastest, followed by

household debt Total U.S. Debt 350% of GDP Finance now dominates the real economy –

financialization of economy – tail wagging the dog

Financial derivatives & transactions multiple of real ecy

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Inverted Liquidity Pyramid - $607 trillion - 13 x world GDP

European Union

Biased nature of EU. Core and peripheral countries

different productivity and inflation rates but still same currency and monetary policies

Peripheral countries unable to compete with core > worsening current account imbalance

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Current Account Imbalance

Current account deficits financed by debt creating financial flows – bank loans and portfolio investments from core countries

Increase in external debt Increase in domestic debt through

financialization – increase in household debt and financial debt

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Bank Crisis of Core Countries

Banks from core ctries esp Germany and France lent to peripheral countries at low interest rates because of EU – mispriced risks

Most of the debt was private sector debt

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European Crisis Act II of GFC

Problems worsened with Global Financial Crisis

State revenue plunged, expenses rose due to fiscal prime pumping

Fiscal and monetary loosening created a new set of bubble

Greek sovereign debt – equivalent of U.S. subprime loans

Contagion effect on other countries12

Rescue of Banks not Countries

E.U. rescue plan not to rescue the peripheral countries but to rescue the banks from core countries that are heavily exposed

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THANK YOU

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