Euro crisis

Group: Roll No:

Sandeep Vishwakarma 53

Pavan Dubey 16

Surinder Verma 52

Surabhi Chaughule 09

Aakash Jain 21

WHAT IS EUROPE ??

How many countries are there in Europe ??

Euro zone

The Eurozone officially called the euro area

Is a monetary union of 19 of the 28 European Union (EU) member states 

Which have adopted the euro (€) as their common currency and sole legal tender.

The other nine members of the European Union continue to use their own national currencies, although most of them are obliged to adopt the euro in future.

The eurozone consists of:

 Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Other EU states (except for Denmark and the United Kingdom) are obliged to join once they meet the criteria to do so.

European UnionThe European Union (EU) is a politico-economic union of 28 member states that are located primarily in EuropeThe European Union (EU) is an economic and political union of 27 member states which are located primarily in Europe.

 EU policies aim to ensure:1.The free movement of people, goods, services, and capital within the internal market 2.Enact legislation in justice and home affairs,

3.Maintain common policies on trade, agriculture, fisheries, and regional development.

 A monetary union was established in 1999 and came into full force in 2002, and is composed of 19 EU member stateswhich use the euro currency.

The EU operates through a hybrid system of supranational and intergovernmental decision-making

Maastricht Treaty

The Maastricht Treaty (formally, the Treaty on European Union or TEU) undertaken to integrate Europe was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands.

entry into force on 1 November 1993, it created the European

Union and led to the creation of the single European currency, the euro

Single currency in single market makes sense Price transparency Uncertainty caused by Exchange rate fluctuations eliminated Increased Trade and reduced costs to firms Strengthen the economies of euro zone members Borrow money from international financial markets and investors at a

much lower rate A tangible sign of a Europen identity

•This is also known as Euro zone sovereign debt crisis

•The term indicates the financial problems caused due to overspending by come European countries •When a nation lives beyond its means by borrowing heavily, a point comes when it cannot manage its financial obligations.

When that country faces insolvency (unable to repay its debts and lenders start demanding higher interest rates) that nation begins to get swallowed up by what is known as the Sovereign Debt Crisis

Euro zone Crisis – What is it?

•The EDC began in 2008 with the crash of Iceland’s banking system, which spread to Greece.

•Greece had experienced corruption and spending as its government continued borrowing money despite not being able to produce sufficient income through work and goods.

•It was admitted that Greece's debts had reached 300bn euros, the highest in modern history

•Spain, Portugal, and the other nations later followed Greece.

Beginning of Crisis

• Started in – Oct 2009 in Greece

• Its immediate causes lie with

the US crisis of 2007-09.

• The result in Euro Zone was Sovereign debt crisis.

PIIGS: Portugal, Italy, Ireland, Greece, Spain.

What Happened and Why?

• Greece: Sharp Budget Deficit • Large government and External Debts in PIIGS.• Greece credit rating downgraded.• Interest rates surged on government bonds.• Need for external aid from EU and IMF • The high debts and rising rate of interests was a

matter of concern.

The never-ending crisis?

? FINANCIAL CRISIS 2008

ECONOMIC CRISIS 2009

POLICY RESPONSE: STIMULUS

SURGE IN GOVERNMENT DEBT

SOVEREIGN DEBT CRISIS

FINANCIAL STRESSES and ECONOMYSLOWING

?

Euro zone Debt Crisis – History

GREECE•November 5 2009 - Greece reveals that their budget deficit is 1207 percent of GDP

•December 8 2009- Greece's long-term debt to BBB+, from A-.

•March 3 2010- Greece tries to persuade the financial market that they can repay their debts

•April 23 2010- Papandreou asks help from International Monetary Fund after Greece is priced out of the international bond markets.

•June 29, 2011- EU leaders agree on €109bn bailout – which will see private sector lenders take losses of 20%

•October 27 2011- Europe leaders agree new deals that slash Greek debt and increase the power of the main bailout fund to around €1 trillion.

November 6 2011- Prime Minister resigns

•May 2 2010- European finance ministers lend 110€bn which covers until 2013. Greece pledges to bring its budget deficit into line, through unprecedented budget cuts.

•April 17 2011- Greek borrowing costs start rising sharply again, on fears that its austerity measures are failing to work. Greece is now deep in recession.

•June 19 2011- Admits that they need to borrow money again

Europe Debt to GDP (2007)

IMPACT• Contagion Effect Greek crisis has made investors nervous about lending money to

governments through buying government bonds.

• Reduced wealth: Take-home pay is likely to fall as it is eroded by rising taxes.

• Impact on private individuals.

…but banks are not lending as they should

• An economy needs a functioning banking sector to support growth, through bank lending to consumers and businesses

• Banks have tightened their “credit standards” and are lending out less money. Less money in the economy means less economic growth.

• There was too much (private sector) borrowing before the crisis hit, but not enough now to support growth.

How did this evolve?

2000 2004 2008

Availability of cheap debt Capital inflows were not used to help

the economy grow Beginning of the global financial

crisis Shipping and tourism industry

affected by the changes in business cycle

Debt began to pile up rapidly

Pre 2008 Era

2008 2012

Global financial crisis of 2008-09 strained public financesFear of European sovereign debt crisis started in early 2010Difficulty in raising funds Bailout package requested from EU & IMFDebt rating downgraded to “Junk” status.Worldwide impact on stock markets

Post 2008 Era

GLOBAL FINANCIAL CRISIS 2008

What is subprime lending?

Subprime lending means giving loans to people who may have difficulty in maintaining the repayment schedule.

Impacts of Subprime crisis

•Major banks suffered from huge losses. •Lehman Brothers went out of business. •Merrill Lynch had to sell itself to Bank of America for a fraction of its former value

The financial crisis triggered a global economic recession that resulted in more than $4.1 trillion in losses.

Unemployment rates that climbed to more than 10 percent in the United States and higher elsewhere.

Increased poverty.

Stock markets around the world crashed.

Global Impacts of the Crisis

•Investors lost confidence in the stock market.

•Consumer spending slowed down due to lack of cash/ unwillingness. •U.S.A’s economic condition affected the global economy.

•World economy slipped into recession.

•Exports from China, Korea, Taiwan and India decreased.

IMPACT ON INDIAN ECONOMYThe immediate impact of the US financial crisis has been felt when India’s stock market started falling

Impact on India's handloom sector, jewelry export and tourism

With the outflow of FIIs, India’s rupee depreciated approximately by 20 per cent against US dollar and stood at Rs. 49 per dollar at some point, creating panic among the importers

What does Brexit mean for the EU/Eurozone?

No European government has ever publicly announced that it would favour a Brexit scenario

The UK accounts for more than 60 million of the EU's 500 million people and boasts the world's fifth-biggest economy. 

A referendum - a vote in which everyone (or nearly everyone) of voting age can take part – was held on Thursday 23 June, to decide whether the UK should leave or remain in the European Union. Leave won by 52% to 48%. The referendum turnout was 71.8%, with more than 30 million people voting.

Why is Britain leaving the European Union?

Theresa May said she will respect the will of the people and said: "Brexit means Brexit and we're going to make a success of it."

How Brexit will impact the Indian market 

Brexit is a big, once-in-a-life kind of event. It's consequences will last longer than we can think," says Motilal Oswal, CMD, Motilal Oswal Financial Services. 

Brexit will have an impact on India's GDP growth. "We have lowered our aggregate 2016 GDP growth forecast for Asia excluding Japan from 5.9% to 5.6% and India's 2016 GDP growth forecast to 7.3% from 7.6%," said the Nomura Report. 

Uncertainty in new trade laws.

Deficit Balance of payment

The EuroWho manages the Euro?

The European Central Bank:•Ensures price stability

•Controls money supply and decides interest rates

•Works independently from governments

A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued

It can be categorized according to the currency in which it is issued. London is one of the centers of the Eurobond market, with Luxembourg being the primary listing center

for these instruments

Eurobond

The Eurobond market is largely a wholesale, institutional market with bonds held by large institutions

European Central Bank

The European Central Bank (ECB) has taken a series of measures aimed at reducing volatility in the financial markets and at improving liquidity

It began open market operations buying government and private debt securities,

reaching €219.5 billion in February 2012

The European Central Bank (ECB) is the central bank for the euro and administers monetary policy of the Euro zone, which consists of 19 EU member states 

European Financial Stability Facility(EFSF)

The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of the euro zone to address the European sovereign-debt crisis.

 It was agreed by the Council of the European Union on 9 May 2010, with the objective of preserving financial stability in Europe by providing financial assistance to euro zone states in economic difficulty

The EFSF is authorized to borrow up to €440 billion, of which €250 billion remained available after the Irish and Portuguese bailout.

To provide loans to countries in financial difficulties (e.g. Greek bailout)

A legal instrument aiming at preserving financial stability in Europe by providing financial assistance to euro zone states in difficulty.

European Financial Stabilisation Mechanism (EFSM)

On 5 January 2011, the European Union created the European Financial Stabilisation Mechanism (EFSM),

An emergency funding programme reliant upon funds raised on the financial markets

And guaranteed by the European Commission using the budget of the European Union as collateral.

 It runs under the supervision of the Commission and aims at preserving financial stability in Europe by providing financial assistance to EU member states in economic difficulty.

The Commission fund, backed by all 28 European Union members, has the authority to raise up to €60 billion.

The EFSM is rated AAA by Fitch, Moody's and Standard & Poor's. The EFSM has been operational since 10 May 2010.

European Stability Mechanism(ESM)

It was established on 27 September 2012 as a permanent firewall for the euro zone,

It safeguard and provide instant access to financial assistance programmes for member states of the euro zone in financial difficulty, with a maximum lending capacity of €500 billion.

It replaces two earlier temporary EU funding programmes: the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM).

All new bailouts for any eurozone member state will now be covered by ESM, while the EFSF and EFSM will continue to handle money transfers and programme monitoring for the previously approved bailout loans to Ireland, Portugal and Greece.

Outright Monetary Transactions (OMTs)

On 6 September 2012, the ECB announced to offer additional financial support in the form of some yield-lowering bond purchases (OMT), for all eurozone countries.

Unlimited:

The ECB says it will buy as many bonds as it takes for markets to get the message that countries like Greece, Spain and Italy are not leaving the euro, that the single currency is irreversible

Short term:The OMT will only buy short-term bonds between one and three-year duration.

TransparencyAggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis

Single Supervisory Mechanism (SSM)

The Single Supervisory Mechanism (SSM) is the name for the mechanism which has granted the European Central Bank (ECB) a supervisory role to monitor the financial stability of banks based in participating states, starting from 4 November 2014

The ECB's monitoring regime will including conducting stress tests on financial institutions.

If problems are found, the ECB will have the ability to conduct early intervention in the bank to rectify the situation, such as by setting capital or risk limits or by requiring changes in management

However, if a bank is found to be in danger of failing, the responsibility for resolving it will rest with the Single Resolution Mechanism

IMPACT ON OTHER EUROPEAN COUNTRIES

PORTUGAL In the first quarter of 2010 Portugal had one of the best rates of economic

recovery in the EU

Portuguese government public debt has increased due to mismanaged structural and cohesion funds

Bonuses and wages of head officers also resulted to their economic situation

On 16 May 2011- Euro zone leaders officially approved a €78 billion bailout package for Portugal

The country agreed to cut its budget deficit from 9.8% of GDP in 2010 to 5.9% in 2011, 4.5% in 2012 and 3% in 2013

On 6 July 2011-Rating’s agency Moody had cut Portugal’s credit rating to junk status

IRELAND

The Irish sovereign debt crisis arose not from government over spending, but from the state guaranteeing the six main Irish based banks who had financed a property bubble

On 29 September 2008, Finance Minister Brian Lenihan, issued a two-year guarantee to the banks depositors and bondholders

Irish banks had lost an estimated €100 billion

Unemployment rose from 4% in 2006 to 14% by 2010

ITALY Italy’s deficit was 4.6% of GDP in 2010

Italy even has a surplus in it’s primary budget, which excludes debt interest payments. However it’s debt has increased to almost 120% of GDP (US $2.4 trillion in 2010)

Italian bonds more and more as a risky asset for investors

On 15th July and 14th September 2011 government passed austerity measures meant to save €124 Billion

By 8 November 2011, the Italian bond yield was 6.74% For climbing above the 7% level on 11 November 2011, Italian 10 year borrowing costs fell sharply from 7.5% to 6.7% after Italian legislature approved

The measures include A pledge to raise €15 billion from real estate sales A 2 years increase in the retirement age to 67 by 2026 Opening up closed professions within 12 months A gradual reduction in government ownership of local services

SPAIN Spain has a comparatively low debt among advanced economy but

experienced highest unemployment rate of 20%

Spain’s economy is of particular concern to international observers and faced pressure from United States, The IMF, Other European countries and the European commission to cut it’s deficit more aggressively

Announcement of the European Union's new ‘Emergency Fund’ in early May 2010, Spain had to announce new austerity measures designed to reduce budget deficit in order to signal financial market that it is safe to invest in country

Spain succeed in trimming it’s deficit from 11.2% of GDP in 2009 to 9.2% in 2010 and originally expected 6% in 2011 but due to European crisis and over spending by regional government the deficit overshoot target and reached between 6.6% to 8%

The government amended Spanish Constitution in 2011 to require balanced budget by 2020

The amendment states that public debt can’t exceed 60% of GDP, Though exceptions would be made in case of natural calamities, economic recession or other emergencies

FRANCE France was one of the six founding members of the European

Community in 1957

Since the foundation of the European Union, France has been a driving force behind many European projects

France participates in all of the most far-reaching EU projects, including Economic and Monetary Union

France's public debt in 2010 was approximately U.S. $2.1 trillion and 83% GDP, with a 2010 budget deficit of 7% GDP

By 16 November 2011, France's bond yield spreads had widened 450% since July, 2011

France's C.D.S. contract value rose 300% in the same period

BELGIUM In 2010 Belgium's public debt was 100% it’s GDP

The government deficit of 5% was relatively modest and Belgium government 10 years bond yields in November 2010 of 3.7% were still below of these of Ireland (9.2%), Portugal (7%) and Spain (5.2%)

High personal saving rate in Belgium and making it less prone to fluctuations of international market

On 25 November 2011, Belgium’s long term sovereign credit rating was down graded from AA+ to AA by Standard and Poor

10 year bond yields reached 5.66% shortly after Belgian negotiating parties reached on an agreement to form a new government

The deal includes spending cuts and tax rises worth about €11 Billion which should bring the budget deficit down to 2.8% of GDP by 2012 and to balanced the book in 2015

Following the announcement Belgium 10 year bond yields fall sharply to 4.6%

GERMANY In 2011, Germany's economy as measured by GDP produced

$3.085 trillion. This makes it the sixth largest economy, after the European Union (EU), the U.S, China, Japan, and India

Its GDP growth rate was 2.7%, slightly less than the 3.5% rate in 2010, but better than the 4.7% decline in 2009

Its strong manufacturing base meant it had plenty to export to other members of the euro zone, and could do so more cheaply

About 40 percent of German gross domestic product comes from exports, much of them to the EU

PROBLEMS

It combines efficient and indiscipline economies.

Too high debts.

Political problems.• Low Growth• High Unemployment• Slow Decision Making

SOLUTIONSCountries affected must:Grind down WagesRaise ProductivitySlash SpendingRaise taxesTransparent Banking systemEndure such Austerity Drives for many

years

European debt crisis and fragile US recovery have contributed to the growth slowdown of the Indian economy by hurting our exports and affecting capital inflows into India.

The capital outflows have resulted in crash in our stock markets that have affected investment sentiments of the corporate world.

Impact on India:

The rupee’s depreciation, while aggravated by domestic speculative activity, is primarily traceable to the ongoing sovereign debt crisis in Europe

The value of rupee which was around 44.50 rupees to a US dollar in August 2011 fell to as low as 54 rupees to a dollar on December 15, 2011 and was around Rs. 54.8 to a US dollar in the first week of April 2013.

However, we think that current slowdown in economic growth is partly a result as pointed out above, of Eurozone debt crisis and overall global environment, especially slow recovery in the United States and stagnation in the European countries.

Besides, increase in interest rates by RBI to fight inflation has led the corporate sector to defer investment has resulted in the drastic fall in output of capital goods

However, in our view, the Indian economy will soon recover once these short-run problems are resolved. Once inflation is brought under control RBI will cut its interest rates which will give a push to investment that will boost industrial growth.

 If investment in infrastructure increases, as is expected now, this will lead to the expansion in domestic demand for capital goods.

his will ensure a higher growth rate in the next year, 2013-14. Besides, we still have the ability to achieve 8% per cent growth rate even on the basis of our domestic market. 

FUTURE PREDICTEDEither the euro zone should go for

integrating their economic policies. ORIt collapses, and the Greeks and other

profligate countries devalue and the banks (German, French, British and American) lose hundreds of billions.

,

•Emergency loans have been extended as bailouts mainly by stronger economies like France and Germany, as also by the IMF.

•The EU member states have also created the European Financial Stability Facility (EFSF) to provide emergency loans.

•Restructuring of the debt

The US crisis led to Global financial crisis, which further spread to Euro zone and caused Euro zone crisis, as these countries were most affected.

Hence the Big Brothers should help the countries in problem to come out from the crisis.

Conclusion

•The crisis wont stop for a period of time till all debt obligations in eurozone are not cleared.

• The situation is because the euro countries are dependent on each other.

• Hence the countries are not able to repay the debt to countries they borrowed from and hence the lender is in threat of going into debt crisis.

• Policy reactions are made to come out from the debt crisis.