European Debt

PIGS:-

Portugal

Ireland

Greece

Spain

(Italy, France)

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European Debt - Greece

Relaxed work attitude, bloated public sector

precarious and unsustainable state of Greek public finances

threatening a fresh crisis for the region's 11-year-old monetary union (Euro zone)

possibility of Greek default on loans

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European Debt - Greece

European Central Bank in Frankfurt suggests at least a few policymakers might favour throwing the book at Greece

Most blatantly, Greece misled the world about the acuteness of its fiscal plight

European Commission forecast that the Greek public sector deficit this year would be above the 3 per cent limit set under EU rules

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European Debt - Greece

Greece is committed to further fiscal and structural reforms under its €110bn ($140bn) bail-out package by the European Union

annual inflation rate stayed at 5.5 per cent in August

Unemployment is estimated at 12 per cent, say private sector analysts.

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European Debt

2 May 2010 Greece is facing up to three years of recession

Its government owes about 300bn euros ($400bn; £260bn)

the European Union and International Monetary Fund (IMF) announced a bail-out package on 2 May 10

They are offering 110bn euros (£95bn; $146.2bn) spread over three years

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European Debt

S&P has already downgraded Greek debt to "junk", which means it views Greece as a highly risky place to invest.

Why?

Greece has been living beyond its means in recent years

Greek government borrowed heavily and went on something of a spending spree

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European Debt

money flowed out of the government's coffers, tax income was hit because of widespread tax evasion.

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European Debt

What is Greece doing about it?

Austerity package

Greece has outlined plans to cut its budget deficit, or the amount its public spending exceeds taxation, to 8.7% of its GDP in 2010, and to less than 3% by 2012.

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European Debt

Shows the UK in a good light with lower percentage debt averaged over the periods as a percent of GDP

Irish situation also seems to be getting better over the period although they have experienced potential debt default and a bailout

Euro zone debt

The most dangerous countries are those with high government debt and external debt—high current account deficits

Greece's problem is simple: it is the single currency. A country of 11 million people unable to devalue its way out of the crisis

―It is not easy for a country to exit the euro zone. All its debt is denominated in euro; if it exits, there would be a sharp devaluation of the country's currency," Ansgar Belke, professor of macroeconomics at the University of Duisburg-Essen

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Greek Bailouts

First Bailout

2 May 2010 Greece's first International Monetary fund agreed to a €110 billion loan for Greece (slide 5)

Second Bailout July 2011

Greece will be getting EUR109 billion – or $157 billion – on top of EUR110 billion received last year.

http://business.blogs.cnn.com/2011/07/22/greek-bailouts-the-pros-the-cons-and-the-caveats/

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Euro zone debt

Credit ratings of countries very important

We see the government as having made little progress on any growth-enhancing reforms," said the rating agency

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Euro zone debt

If credit rating of country lowered they will suffer an increase in their loan repayments

S&P has already downgraded Greek debt to "junk", which means it views Greece as a highly risky place to invest.

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Euro zone debt

Credit default swaps

Form of insurance, lender takes out insurance if he is not paid by the original borrower.

If borrower defaults the insurance company pays.

Also speculators buy credit default swops, if the borrower defaults they then receive money from the insurance company/original lender

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Euro zone debt

Macro Policy to reduce debt

Fiscal and Monetary

T up PE down IR up

BUT growth necessary to repay loans

Contraction of the economy policy reduces growth

Expansion causes inflation reducing the real debt level – but not possible due to high debts and IMF etc loan strings

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Euro zone debt

Germany doing extremely well, high growth and bop surplus.

Some say Germany expanding at the expense of PIGS, i.e. Reduced Euro value would help PIGS bop but would reduce Germany’s export earnings

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Euro zone debt

Ireland $113 Billion bailout

Greece $140 Billion bailout 1 and bailout 2July 2011Greece will be getting EUR109 billion

European Union cannot finance bailouts. Individual countries finance them. Germany, Uk have provided money for the bailouts, UK 85 bn for Ireland and the IMF

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Greek Bailout

Germany and IMF– Now think the bailouts for Greece have not worked

Want private investors to take 50% cut in their loans made to the Greek Govt

Germany has insisted that nearly a third of Greek debt be written off before agreeing to lend Greece more bailout money

Tried to appoint a European Commissioner this weekend 31st January 2012

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Developments 2012

France – Credit rating cut Jan 12 from AAA to AA – increases

debt repayments

Italy – High debt, possibly in trouble, could cause another crisis

in Europe

Situation worrying. Will Euro survive, in its present form??

Possible reduction in size, possible reorganisation of E.U.

addressing poorer states problem.

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Causes of the crisis

Rising government debt levels

Trade imbalances

Monetary policy inflexibility

Loss of confidence

Rating agency views

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Rating agency views

1) Tightening credit conditions across the eurozone

2) Markedly higher risk premiums on a growing number of

eurozone sovereigns including some that are currently rated

'AAA‘

3) Continuing disagreements among European policy makers on

how to tackle the immediate market confidence crisis and,

longer term, how to ensure greater economic, financial, and

fiscal convergence among eurozone members

4) High levels of government and household indebtedness across a

large area of the eurozone

5) The rising risk of economic recession in the eurozone as a whole

in 2012 - a 40% probability of a fall in output for the eurozone

as a whole."