Eurozone 2

Rahul Reddy

The Real Problem All Symptoms

US Subprime crisis Iceland Greece, Ireland etc

What is the real problem Abundance of cheap credit Money created out of nothing High Fiscal Deficits Highly leveraged financial institutions

The Crisis is not over Some mind boggling numbers (2002-current)

Worldwide debt public + Private ($84 to $195 trill) Ireland Debt = 25 (Annual Tax Revenues) Spain and France Debt = 10 (Annual tax Rev)

Banks are extensions of Government US Fed reserve taken over $2 trill of junk

securities Ireland taken over $80 bn debts of all Ailing Banks

The world survives for now People’s faith in Government (shaken but

survives)

Can the world survive? Sure

Cut government spending, reduce deficits Reduce Government debt Fiscal Surplus in place of Fiscal Deficit Control money supply, get back to Gold standard?

Any chance of it happening Sure, the politicians would do it? (At Gunpoint) Greece implemented austerity (under duress) We, the people need to understand and fight

Iceland A large insulated country

Barely 300,000 citizens Traditional industry was fishing – Profitable Stable: High education, zero poverty etc

What happened? Almost overnight Fisherman became bankers Banking assets (loans) 2003 to 2007 (4bn - 140bn) Borrow and buy (Stocks, Real estate across EU) Make extremely risky loans

Iceland

Bizarre social change Everyone wanted to be a banker or in finance University courses shifted Engg to Fin Engg The Culprit: Access to unlimited cheap credit

The result $ 100 bn of Banking losses Debts at 850% of GDP Individual debts (Houses, Cars etc)

Greece 1980’s and 1990’s

Greece was seen as Europe’s underperformer Fiscal Deficits high and hence High Interest Rates No Mortgage loans, No Credit cards in Greece

And along came the EURO To join EU, they showed FD < 3%, other targets Manipulation of figures to outright fraud Now Greece could get funds at German rates Indiscriminate borrow and spend I-Banks taught them to securitize all cash flows

Greece

Some Stats October 2009 FD was estimated as 3.7% Two weeks later, was revised to 12.5% and

then 14 $400Bn of Govt Debt and $800 Bn of pensions $250,000 of debt for each greek citizen Rampant corruption & Low Tax collection Inefficient PSU, Over employment, High

Salaries, zero accountability, High social schemes etc

Ireland A property bubble

Flood of cheap credit Financed property developers Construction became 25% of the GDP Prices quadrupled, Rent 1% of property value Worked as long as fresh money kept pouring in

The Irish Banks (esp the Big Six) Borrowed cheaply from Germany and USA Total losses $10.6 trillion (4 times Govt Rev)

Ireland The Bailout

Government took over losses of 6 banks Both Depositors and Bond holders Irish FD went up to 32% of GDP Unemployment rate up at 14% and climbing

Was the bail out required? Exposure of Banks restricted to Real Estate Depositors protected but why bond holders? Was Irish Govt mislead to the extent of losses?

The Irish Banking collapse Simpler, easier to understand bubble No complicated derivates, instruments like CDS etc The Bankers also lost their money unlike USA

Lessons An Age old lesson – Live within your means

Applies for Individuals, Companies and Countries

Countries can default, go bankrupt A government bond is not risk free Fiscal Deficits cannot be sustained indefinitely

Bailouts are bad Moral Hazard (People take more risks)

Money cannot be created out of thin air Cheap and excessive credit is key reason