Download - European Financial Crisis-2013
-
8/9/2019 European Financial Crisis-2013
1/45
European Financial CrisisSai Kumar Swamy
Course Director, T.I.M.E.
PGPM IIM Bangalore
-
8/9/2019 European Financial Crisis-2013
2/45
-
8/9/2019 European Financial Crisis-2013
3/45
GenesisEU Economic & Political Union of 27 member states
500 Mn citizens
GDP - $18Tn and 20% of total world output
Free movement of people, goods, services & capital
Schengen – Free movement – Abolition of passport controls
Treaty of Maastricht – 1st Nov 1993
Salient Features
Common Currency - Euro
EMU
SGP - Stability & Growth Pact Convergence Criteria – Article 121
Inflation; Deficit & Debt; Interest rates
Fiscal Monitoring of members
Article 122
EC can take measures to help an ailing country
-
8/9/2019 European Financial Crisis-2013
4/45
Sub-Prime Crisis
Sub-Prime loansHousing Bubble Fuelled by Low interest rates Supply Glut Foreclosures
MBSCDSFailure of Banks Credit Crunch Reduced Output – Unemployment
Government Bail-outs Stimulus Packages Fannie Mae and Freddie Mac
Keynesian model adopted – Deficit Spending
Contagion effect – Global linkages
-
8/9/2019 European Financial Crisis-2013
5/45
European Financial Crisis
-
8/9/2019 European Financial Crisis-2013
6/45
Principal Actors - Iceland
Pre 1990sNatural resources
Tourism – Fiords, Glaciers and Geysers
Fishing – Salted Cod
David OddssonMayor of Reykjavik
Prime Minister in 1991
Promised to end the boom and bust cycles based on Fish catch
Privatization - $2Bn
Privatized banking industry
Thrust on
Biotechnology
Software
-
8/9/2019 European Financial Crisis-2013
7/45
Principal Actors - IcelandBanking
Tapped Overseas markets Landbanski – ‘Icesave’ Scheme
High interest rates
Banking accounted for 75% of stock market
Kaupthing Bank
Assets –
208Bn Krn in 2000 6600Bn Krn in 2008 Loans & Assets were 10 times Iceland GDP
High inflows Strong kronor
Consumption led economy
Global Financial Crisis – large scale outflow of funds
Central bank had €2Bn – Loans were €70Bn Defaults by Glitner bank – €600Mn
Govt. bailout for Glitner – Landsbanski – Kaupthing
Misuse of banks by promoters
Too big to fail hypothesis negated by Iceland
-
8/9/2019 European Financial Crisis-2013
8/45
Principal Actors - Ireland
Economic Transformation in the 90’s Low Taxes – Educated workforce – Entry of MNCs
Bridge between US and Europe
GDP Growth rate of 6.5%
Celtic Tiger
Housing BoomCheap Loans – Tax Incentives House prices increased 3 fold in a decade
40% of houses built in 1996-2006
Housing Bubble Over Supply
Speculative nature of demand
‘Sub-prime echoes of the US
Multi unit loans to property developers with ‘sub-prime’ characteristics
-
8/9/2019 European Financial Crisis-2013
9/45
Principal Actors - Greece
Cause
Economic downturn post 2008 Tourism & Shipping badly hit
Govt. revenues decreased significantly
Govt. expenditure increased – worsened debt situation
Huge spending – Deficit Budgets
Cheap lending
Lack of financial reform
Government cooking the accounts
Effect €300 billion Debt
Budget Deficit – 12.7% Violation of Growth & Stability Pact
Accumulated debt – Estd. at 160% in 2011
Credit Rating downgraded
Bond Yield – 34%
-
8/9/2019 European Financial Crisis-2013
10/45
Principal Actors - Greece
Bailouts
45Bn (2010)
130Bn (2011)Troika – EC, ECB, IMFSteps Taken Debt Restructuring
Cut in spending Austerity measures
Increase in Taxes Better Tax collection
Public Sector Pay cuts Inc in retirement age by 2 yrs – Later by 4
Denationalization to raise money
Fears
Civil Unrest Anti austerity parties winning 2012 elections - GREXIT
Sovereign Debt default Orderly Default – Debt write off - 50%
Euro under pressure
Light at the end of the tunnel – Bond yields below 10%
-
8/9/2019 European Financial Crisis-2013
11/45
Principal Actors - Spain
GDP contracted in 2008 Construction Sector – 10% of GDP
Housing Bubble Price increases of more than 200%
Bubble started in 1995 and sustained till 2007
28% of houses vacant Fuelled by tax incentives similar to India
High indebtedness
High Inflation High Oil prices
High Interest Rates pricks the bubble Large scale unemployment ~ 25-30%
Severe pressure on Banking system
Bond Yield – 5%
-
8/9/2019 European Financial Crisis-2013
12/45
Principal Actors - Portugal
GDP – $220Bn Tourism, Cork, Fishing, Wine
High Debt to GDP Ratio – 113%
Mostly external debt
Socialist Govt. with excess spendingVery low GDP growth rates
Debt Servicing Issues Unable to generate new loans
Required a bailout from EU
Bond Yield – 12-15%
Severe unemployment – 12.4% in 2011
Emigration
Austerity measures Social Unrest
-
8/9/2019 European Financial Crisis-2013
13/45
Italy 7th largest economy
GDP - $2 Tn
Manufacturing & Services led economy Big brands – Quality products
Current Issue Huge Debt to GDP ratio – roughly 120% in 2010
Similar to Greece Key difference is that most of it is internal
Recession
Contraction of almost 7% in GDP
Political Weakness
High Govt. Spending – Profligacy Black market economy
Organized crime – 7% of GDP
Protection money
Bond Yield – 5-6%
-
8/9/2019 European Financial Crisis-2013
14/45
Current Status
Greece Austerity measures
Looking for a bail-out
Germany against such a bailout – France in favour
Portugal
Govt. trying to raise money to prop up banking system
Failed Bond Auction to raise €500Mn
Bailout required
Spain & Ireland
Reduce fiscal deficit
Rollback Keynesian debt fuelled monetary policies
-
8/9/2019 European Financial Crisis-2013
15/45
Future ScenarioSovereign Debt Crisis loomsEuro under threat The concept of ‘United States of Europe’ in grave danger
Political Union of Europe unlikely
Issues of Solidarity & ResponsibilityReturn to ‘Non-Keynesian’ policies can further deflatethe economiesDouble Dip recession possible
Common Fiscal Policy for the EU Two Solutions EMF – Fund for Bailouts - EFSF
European Treasury – Single authority for Tax policy
Govt. Spending
-
8/9/2019 European Financial Crisis-2013
16/45
Annexures
-
8/9/2019 European Financial Crisis-2013
17/45
Long Term Interest Rates
-
8/9/2019 European Financial Crisis-2013
18/45
Deficit & Public Debt - 2009
-
8/9/2019 European Financial Crisis-2013
19/45
Deficit & Public Debt - 2012
-
8/9/2019 European Financial Crisis-2013
20/45
Debt of Eurozone Countries
-
8/9/2019 European Financial Crisis-2013
21/45
Public Debt and Debt as % of GDP
-
8/9/2019 European Financial Crisis-2013
22/45
Public Debt as % of GDP - World
-
8/9/2019 European Financial Crisis-2013
23/45
S&P Ratings
-
8/9/2019 European Financial Crisis-2013
24/45
Belief in God
-
8/9/2019 European Financial Crisis-2013
25/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
26/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
27/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
28/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
29/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
30/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
31/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
32/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
33/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
34/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
35/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
36/45
Cartoons
-
8/9/2019 European Financial Crisis-2013
37/45
PIIGS
-
8/9/2019 European Financial Crisis-2013
38/45
Foreclosures
S b P i Vi i C l
-
8/9/2019 European Financial Crisis-2013
39/45
Sub-Prime Vicious Cycle
-
8/9/2019 European Financial Crisis-2013
40/45
Geyser Economy
-
8/9/2019 European Financial Crisis-2013
41/45
Greek Debt vs. Eurozone average
-
8/9/2019 European Financial Crisis-2013
42/45
US vs. the Eurozone
-
8/9/2019 European Financial Crisis-2013
43/45
Housing Prices - Ireland
100% Loans
-
8/9/2019 European Financial Crisis-2013
44/45
100% Loans
-
8/9/2019 European Financial Crisis-2013
45/45
Portugal – Sick Man of Europe