European sovereign-debt crisis

EUROPEAN SOVEREIGN-DEBT CRISIS

PGDM SEM IVPresented By : Roll No. Heli Jani 18 Tejas Kadam 19 Prasannajit Lahiry 22 Rupashree Mane 23

Submitted to : Prof. Shraddha Kotak

EuropeSecond smallest continent47 member countriesPopulation of 731 million (Less than that of India)First to industrializeGDP in 2010 - $19.92 trillion (32.4% of the World)Germany, France and UK are 4th, 5th and 6th largest economy in the World..

INTRODUCTION

Sovereign debt inception took place in late 2009Crisis developed among investors as a result of rising private & govt. debt levels around the world3 countries severely affected- Greece, Ireland & PortugalThese three countries account for 6% of Eurozones GDP

Contd..

In 2012 Spain became a concernRising interest rates started affecting the ability to access Capital markets leading to bailout of banks and other measuresThe crisis had major impact on European union politicsLeading to power shifts in several European countries, most notably in Greece, Ireland, Italy, Portugal, Spain & France

Offenders

Italy Worst offender; regular in breaking 3% limitGermany and France followedAlmost everyone joinedGreece never stuck to 3% target, manipulated its borrowing statisticsHeavy borrowings

Outcome Greece defaultsHuge Sovereign debt of Eurozone CountriesGovt. and Banks in Eurozone have about $500 billion in outstanding bonds coming due in first quarter of 2012Banks not in a position to issue corporate bonds at affordable ratesRecession Everyone is sitting on their moneyWeakening of EuroImpacted growth in other parts of the World

Rising household and government debt levels

Debt crisis caused by excessive social welfare spendingIncreased debt levels were mostly due to large bailout packages provided to the financial sectorThe fiscal deficit in euro area was only 0.6% which rose to 7% during financial crisis

Contd..IMF reported in 2012, the ratio of household debt to income rose by an average of 39% points to 138% in Denmark, Ireland, Iceland & NetherlandsIn the same period, the average government debt rose from 66% to 84% of GDP.By the end of 2011, real house prices had fallen from their peak by about 41% in Ireland, 29% in Iceland, 23% in Spain and the United States, and 21% in Denmark.

TRADE IMBALANCES

A trade deficit can also be affected by changes in relative labor costs, which made southern nations less competitive and increased trade imbalances. Since 2001, Italy's unit labor costs rose 32% relative to Germany's.Greek unit labor costs rose much faster than Germany's during the last decade.

MONETARY POLICY INFLEXIBILITY

Eurozone establishes a singlemonetary policyindividual member states can no longer act independentlypreventing them fromprinting moneyin order to pay creditors and ease their risk of defaultBy "printing money", a country's currency isdevaluedrelative to its (eurozone) trading partners Making its exports cheaper, increased GDP and higher tax revenues innominal termsThe loss of confidence is marked by rising sovereign CDS (credit-default swaps) prices, indicating market expectations about countries creditworthinessSince countries that use the euro as their currency have fewer monetary policy choices certain solutions require multi-national cooperation

IRELAND

The Irish sovereign debt crisis was not based on government over-spending, but from the state guaranteeing the six main Irish-based banks who had financed aproperty bubble.Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans to property developers and homeowners made in the midst of the property bubble, which burst around 2007.Unemployment rose from 4% in 2006 to 14% by 2010, while the national budget went from a surplus in 2007 to a deficit of 32% GDP in 2010, the highest in the history of the eurozone, despite austerity measures.

PORTUGAL

Portugal requested a 78 billion IMF-EU bailout package in a bid to stabilise itspublic financesThese measures were put in place as a direct result of decades-long governmental overspending and an over bureaucratizedcivil serviceOn 16 May 2011, the eurozone leaders officially approved a78 billionbailout package for Portugal, which became the third eurozone country, after Ireland and Greece, to receive emergency fundsThe average interest rate on the bailout loan is expected to be 5.1 percent. As part of the deal, the country agreed to cut its budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012.