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European Financial Crisis
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Agenda
Genesis
Sub-Prime CrisisContagion Effect
European Financial Crisis IcelandPrincipal Actors PIIGS
Current Status
Future Scenario
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Genesis
EUEconomic & Political Union of 27 member states Free movement of people, goods, services & capital
Schengen Free movement Abolition of passport controls
Treaty of Maastricht 1st Nov 1993
Salient Features
Common Currency - Euro EMU
SGP - Stability & Growth PactConvergence Criteria Article 121
Inflation; Deficit & Debt; Interest rates
Fiscal Monitoring of members
Article 122 EC can take measures to help an ailing country
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Sub-Prime Crisis
Sub-Prime loansHousing Bubble Fuelled by Low interest rates Supply Glut Foreclosures
MBS
CDSFailure of Banks Credit Crunch Reduced Output Unemployment
Government Bail-outs Stimulus Packages Fannie Mae and Freddie Mac
Keynesian model adopted Deficit Spending
Contagion effect Global linkages
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European Financial Crisis
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Principal Actors - Iceland
Pre 1990s
Natural resources Tourism Fiords, Glaciers and Geysers
Fishing Salted Cod
David Oddsson
Mayor of Reykjavik
Prime Minister in 1991
Promised to end the boom and bust cycles based on Fish catch
Privatization - $2Bn Privatized banking industry
Thrust on
Biotechnology
Software
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Banking Tapped Overseas markets
Landbanski Icesave Scheme High interest rates
Banking accounted for 75% of stock market
Kaupthing Bank
Assets 208Bn Krn in 2000 6600Bn Krn in 2008 Loans & Assets were 10 times Iceland GDP
High inflows Strong kronor
Consumption led economy
Global Financial Crisis large scale outflow of funds Haarde in US for assistance
Central bank had 2Bn Loans were 70Bn
Defaults by Glitner bank 600Mn
Govt. bailout for Glitner Landsbanski - Kaupthing
Principal Actors - Iceland
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Socialist country Deficit 8.3% of GDP
Foreign Liabilities 108% Spain 91% ; Greece 87%
Weak economy suffering from early dictatorial regimes High Public Debt
Steps Taken Increase in Taxes Shoring up Govt. revenues
Cut spending on defence and infra projects Privatization State schemes to guarantee Credit institutions - 20Bn Guarantees to depositors - 100000
Principal Actors - Portugal
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Economic Transformation in the 90s
Low Taxes Educated workforce Entry of MNCs
Bridge between US and Europe
GDP Growth rate of 6.5%
Housing Boom
Cheap Loans Tax Incentives House prices increased 3 fold in 10 yrs
40% of houses built in 1996-2006
Housing Bubble Over Supply
Speculative nature of demand
Not of the Sub-prime variety of the US
Multi unit loans to property developers with sub-prime characteristics
Principal Actors - Ireland
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Cause Huge spending Deficit Budgets
Cheap lending Lack of financial reform
Government cooking the accounts
Effect 300 billion Debt
Budget Deficit 12.7%
Violation of Growth & Stability Pact
Credit Rating downgraded
Principal Actors - Greece
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Steps Taken/To be taken Cut in spending
Austerity measures
Increase in Taxes
Better Tax collection
Public Sector Pay cuts Increase in retirement age by 2 yrs
Fears Civil Unrest Sovereign Debt default
Euro under pressure
Principal Actors - Greece
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GDP contracted in 2008 Construction Sector 10% of GDP
Housing Bubble Price increases of more than 200%
Bubble started in 1995 and sustained till 2007
28% of houses vacant
Fuelled by tax incentives similar to India
High indebtedness
High Inflation
High Oil pricesHigh Interest Rates pricks the bubble Large scale unemployment ~ 25-30%
Severe pressure on Banking system
Principal Actors - Spain
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Current Status
Greece
Austerity measures
Looking for a bail-out
Germany against such a bailout France in favour
Portugal
Govt. trying to raise money to prop up banking system
Failed Bond Auction to raise 500Mn
Spain & Ireland
Reduce fiscal deficit
Rollback Keynesian debt fuelled monetary policies
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Future Scenario
Sovereign Debt Crisis looms
Euro under threat
The concept of United States of Europe in grave dangerPolitical Union of Europe unlikely
Issues of Solidarity & Responsibility
Return to Non-Keynesian policies can further deflatethe economiesDouble Dip recession possible
Common Fiscal Policy for the EU Two Solutions EMF Fund for Bailouts
European Treasury Single authority for Tax policy
Govt. Spending
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Readings
http://bx.businessweek.com/european-financial-crisis/view?url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB12303266006
0735767.html%3Fmod%3Drss_whats_news_us
http://bx.businessweek.com/european-financial-crisis/
http://www.2000wave.com/article.asp?id=mwo021910
http://en.wikipedia.org/wiki/European_union
http://www.iflr.com/Article/2324178/Portugal-Restoring-confidence.html
More on the GDPI Briefcase
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Questions & (Hopefully) answers!
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Annexures
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Foreclosures
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Sub-Prime Vicious Cycle
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How the Cookie Crumbled
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Geyser Economy
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PIIGS
Used to refer to thesouthern Eurozone
troubled economies ofPortugal
Ireland
ItalyGreece
Spain
Derogatory term
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Gross Public Debt
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European Union
Pop - 500 Mn
GDP - $18TnBiggest in the world
30% of total world
outputCommon Currency
2nd most preferred
reserve currency 25% of all Forex holdings
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Belief in God