Tarun Chugh

EUROPEAN DEBT CRISIS

Department Assistant

Hughey Center For Financial Services

History of the Euro zone

Maastricht Treaty Amsterdam TreatyEuropean Central Bank Euro Circulation

Countries in the Euro zone Germany FranceItaly Spain

Portugal Greece

Austria Netherlands

Slovakia Slovenia

Cyprus Estonia

Malta Ireland

Belgium Finland

Luxemborg

Big & Nuisance Players of EU

Germany ; 20.2

France; 15.8

UK; 13.9

Italy, 12.7

Spain, 8.7

Nether-lands; 4.8

Greece, 1.9

Portugal, 1.4 Ireland, 1.3

Conditions to be in the Euro zoneInflation in each country can only be 1.5%

more than the average of the 3 lowest nations

Gross debt to GDP ratio cannot exceed 60%

Government deficit to GDP cannot exceed 3%

The interest for the zone cannot exceed more than 2% points than the average of the lowest three nations

Initially Growth was Encouraging

Yields dropped and the party was on…

Reduced the cost of debt for weaker nations

Lowest yield for Italy was 3% Current yield is 7.28%

Stability of the Euro zone let weaker nations Lever up…

Which they happily did..

Happy Europeans !

Financial crisis and European debt crisis are interlinked2008-2009 financial crisis dealt a heavy

blow to the European economyLeverage became a dirty word and it led

to a crisis of confidence the world over“The ever-widening financial crisis has

shaken investors’ faith in the whole

system. People no longer trust

assurances that fancy financial

instruments will function the way

they’re supposed to” Paul Krugman 2008

Goldman Sachs deals with GreeceGreece did deals with investment bankers

to hid its debt with the use of fancy derivative deals

Greece used these instruments in early 2000s to hid its debt to het entry in Euro zone

The debt to GDP ratio reduced by 1.6% in 2001

Full disclosure in 2010 led to the first $ 140 billion dollars bailout plan (May,2010)

Euro zone GDP growth 2009

Europe Debt to GDP (2007)

Europe is highly leveraged…

Debt to GDP Ratio (2007)

Above 75%Italy Greece Belgium

50-75%Austria France Portugal

GermanyCyprus

25-50%Slovakia Spain Netherlands

Finland

0-25%Estonia Luxembourg Slovenia

Ireland

Debt to GDP Ratio (2010)

Above 75%Belgium Italy Germany Greece

France Ireland

50-75%Netherlands Spain Austria

Cyprus

25-50%Slovenia Slovakia Finland

0-25%Luxemborg Estonia

•Low Growth

•High Debt Levels

•High Unemployment

•Slow Decision Making

Central Problem

Central Problem

Size of the Problem

Germany

Italy

France

Spain

Greece

Portugal

Ireland

0 0.5 1 1.5 2 2.5

Debt in trillions of Euro

Debt in trillions of Euro

Banks hold a bit of Greek bonds

But a lot of Italian bonds

Size of the CDS market

Why don’t the Europeans inflate the debt away ?

Austerity its not over rated

Greece needs a haircut and badly

And maybe Italy does too

Actions taken till todayEuropean Financial Stability Fund with

resources of €780 billion50% haircut on Greek bonds which is an

orderly default20-30% guarantee on bonds of the

peripheral countriesCalls for Eurobonds and closer fiscal union

Future scenarios

Dilbert’s take on Europe

Questions ?

ReferencesWashington post ReutersGMOWorld bank dataNew York TimesTrading Economics