1. Flow of Presentation Introduction Making of the Crisis PIIGS
Solutions Possible Future Scenarios
2. Introduction: In 1958, an organization called European Coal
and Steel Community was formed. This evolved in European Union (EU)
which was established by the Maastricht Treaty in 1993. The EU
introduced Euro in 1st January, 1993. From that day 11 countries
started using Euro. There are 27 counties are in the European Union
Currently 17 countries have the EURO currency.
3. Late 2009,Investors started loosing confidence.Problems rose
in early 2010,for PIGS to refinance its debts.The onus of the bail
out falls on Germany , the strongest country in the Euro Zone.The
current euro crisis threatens to shake the financial world.
4. Making Of The Crisis Rising In Government Debt Levels Trade
Imbalances Monetary Policy Inflexibility Loss Of Confidence
5. Rising Government Debt Level Violation of Maastricht Treaty
Average fiscal deficit in the euro area in 2007 was only 0.6%
before it grew to 7% during the financial crisis. average fiscal
deficit in the euro area in 2007 was only 0.6% before it grew to 7%
during the financial crisis
6. Trade Imbalance: Imbalance in BoPMonetary policy
inflexibility: Week Euro Countries do not have option of currency
devaluation.Loss of Confidence: As the crisis developed it became
obvious that Greek, and possibly other countries, bonds offered
substantially more risk.
7. Greece Government ran a huge deficit To finance public
sector jobs, pensions, and other social benefits Initially currency
devaluation and then introduction of Euro gave borrowing power
Misreported financial statistics with help of Goldman Sachs After
the 2008 recession Greece economy took a hit as its main industries
(shipping and tourism) were affected
8. Revised its deficit from an estimated 6% to 12.7%. In May
2010, the Greek government deficit was estimated to be 13.6% Debt
is reported to be 120% of the GDP Downgrading of the debt Austerity
measures
9. Ireland The Irish economy expanded rapidly during the Celtic
Tiger years (19972007). This led to an expansion of credit and
included a property bubble which petered out in 2007. State
guaranteed the six main Irish-based banks that financed the
property bubble Irish banks lost an estimated 100 billion euros
Shifted the loss to taxpayers GDP contracted by 14% &
unemployment rose by 14%
10. Italy The debt of Italy has increased to almost 120 percent
of GDP Longer maturity and is held domestically Deficit is
4.6%
11. Portugal Government encouraged over expenditure and
investment bubbles through unuclear public private partnerships
Funding of numerous ineffective and unnecessary external
consultancy and advisory of committees and firms Increase in
redundant public servants
12. Spain One of the largest Eurozone economies The countrys
public debt relative to GDP was 60 percent in 2010 Most of it
controlled internally
13. Is there a way out?
14. CURRENT ACCOUNT BALANCES OF MAJOR EUROSTATES
15. European Financial StabilityFacility (EFSF) Established on
9th May,2010 this facility aims at providing financial assistance
to countries in need. They can issue bonds or debt instruments in
the market. Emissions of bonds are backed by guarantees given by
the euro area member states. It has a lending capacity of 440
Billion Euros.
16. European Financial StabilizationMechanism (EFSM) It is an
emergency funding program reliant upon funds raised on the
financial markets. It is guaranteed by the European Commission. It
has the authority to raise up to 60 billion. It runs parallel to
the EFSF.
17. Breakup of the Eurozone Economists always criticize Euro
currency system because of lacked a central fiscal authority They
recommended that Greece and the other debtor nations unilaterally
leave the Eurozone, default on their debts, regain their fiscal
sovereignty, and re- adopt national currencies Bloomberg suggested
in June 2011 that, if the Greek and Irish bailouts would fail, an
alternative would be for Germany to leave the eurozone in order to
save the currency through depreciation
18. Eurobonds European Commission suggested that Eurobond
issued jointly by the 17 euro nations would be an effective way to
tackle the financial crisis. Using the term "stability bonds
19. ECB interventions It began open market operation buying
government and private debt securities in May 2010, reaching 211.5
billion by end of 2011 It loaned 489 billion to 523 banks for an
exceptionally long period of three years at a rate of just one
percent.
20. Scenarios: Next potential flashpoints foreuro zone debt
crisis Rating AgenciesStandard & Poors -It could downgrade 15
euro zone members, includingAAA-rated Germany and France, if EU
summit failed to providemeasures to tackle the debt crisis.Moodys
Investors Service- It intends to review the ratings of all
27members of the European Union in the first quarter of 2012 Rescue
FundsThe European Financial Stability Facility (EFSF)-250 billion
euros.The European Stability Mechanism (ESM)- 500 billion euros in
mid-2012
21. But The ESM is still 6 or 7 months away and Germany has
refused tolet it have a banking license which would allow it to
draw upon ECB fundswhile the US and others appear reluctant to give
the IMF more resources Italy, Spain and France together have to
raise an average 17 billion euros of government debt every week in
2012, leaving plenty of scope for a funding accident. Italy-Pushing
through a harsh austerity program, including pension reform, tax
hikes and spending cuts, which is vital to avoid Italy becoming
insolvent. Spain -Tough amendments to a labour reform to help untie
wages from inflation and to raise competitiveness partly through
cutting business tax rates and wants to finish off a restructuring
of the financial system.
22. Four Possible Scenarios Successful Resolution of Crisis
Orderly Greek Default Disorderly Default-Banking Crisis in EU
Collapse of Europe
23. Successful Resolution of CrisisEnvironment Effectiveness of
ESFS, EFSM European countries experience slow recovery at 1.6%
in2012(ECB Central Forecast)Best policy Responses(FP Tight MP
Tight) Tight Fiscal policy supported by IMF programmes Tight
monetary policy to defend exchange rate Growth policy should focus
on improving productivity and innovation
24. Orderly Greek DefaultEnvironment Expanded ESFS buys bonds
of indebted countries Export demand leading to job lossesBest
Policy Responses Expand Expand government expenditure to support
demand in countries with lower external debt; cut taxes (flat
taxes) and widen the tax base Maintain tight monetary policies to
support exchange rates Countries should press for faster EU entry
to access ESFS/EFSM and structural funds to support long term
growth
25. Disorderly Default-Banking Crisis inEUEnvironmentEuropes
banks must find of 115 billion euros extra capital to make them
strong enough towithstand the euro zone debt crisis Disorderly
Greek default triggers banking crisis Contagion to other indebted
Eurozone countries EU banks pull out reducing staff and branches,
consolidating to smaller sizeBest policy response (FP loose, MP
loose) Central banks should expand liquidity to offset foreign bank
withdrawal Collapse of export demand requires slower fiscal
consolidation Begin to diversify exports to emerging markets
Temporary capital controls to prevent capital flight Industrial
policies plus temporary job creation
26. Euro zone Break UpEnvironment Greece leaves euro triggering
others to exit EU GDP contracts by 5%; GDP falls by 6% in 2012
Unemployment rises above 25% in all countries Migrants return from
EU countries; remittances collapsePolicies (FP tight, MP loose) To
allow currency depreciation austerity with changed long run growth
strategy) Expand CEFTA to take in Turkey, North Africa Rethink
speed of EU accession Place greater reliance on regional
cooperation
27. Sources of Information Long-term interest rate "Long-term
interest rate statistics for EU Member States "EU debt crisis:
Italy hit with rating downgrade "Peripheral euro zone government
bond spreads widen "Acropolis now "EU ministers offer 750bn-euro
plan to support currency
28. "Leaders agree eurozone debt deal after late-night talks
"Angela Merkel vows to create fiscal union across eurozone "PIIGS
Definition "WRAPUP 5-Europe moves ahead with fiscal union, UK
isolated http://www.cnbc.com/id/45653146/Scenarios_Next_p
otential_flashpoints_for_euro_zone_debt_crisis
http://www.oecd.org/dataoecd/53/58/48789363.pdf
