euro-zone crisis revised
DESCRIPTION
Euro Zone crisis and the quantitative easingTRANSCRIPT
EURO Zone EURO Zone CrisisCrisis
Feb 27, 2014
Deshbhratar Sandeep Seungjik YangSung Jin RyuTaro Arakawa
International TradeProf. Vicenzo Quadrini
EURO ZONE CRISIShttp://www.youtube.com/watch?v=I5QwKEwo4Bc http://www.youtube.com/watch?v=I5QwKEwo4Bc http://www.youtube.com/watch?v=I5QwKEwo4Bc
http://www.youtube.com/watch?v=I5QwKEwo4Bc
Incentives of governments to borrow increase both when financial markets become internationally integrated and when inequality rises.
If debt crises are more likely to arise when the stock of public debt is higher, then the growth in government borrowing induced by capital markets liberalization and increased income inequality may contribute to trigger a sovereign debt crisis.
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Contents
1 Euro Formation
2 Causes
3 Measures
4 Challenges/ Future
1 Euro Formation
The EUROZONE
• Officially called Euro Area
• Introduced in 1999
• Single currency shared by 18 of the
European Union's member states
Euro Formation
Early Stage• When it was launched on 1 January 1999, the euro became the
new official currency of 11 Member States
Euro adoption2014: Latvia2011: Estonia2009: Slovakia2008: Cyprus, Malta2007: Slovenia2002: Introduction of euro banknotes and coins2001: Greece1999: Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland
Euro Formation
Enlargement• Ten countries (Bulgaria, Croatia, Czech
Republic, Denmark, Hungary, Lithuania,
Poland, Romania, Sweden, and the United
Kingdom) of the EU do not use the euro
• Lithuania is due to adopt the euro from 1
January 2015
• Denmark and UK are legally exempt from
joining the eurozone
Euro Formation
Comparison of eurozone with other economies
Population GDP % world Exports Imports
Eurozone 317 million €8.4 trillion 14.6% 21.7% GDP 20.9% GDP
EU (27) 494 million €11.9 trillion 21.0% 14.3% GDP 15.0% GDP
United States 300 million €11.2 trillion 19.7% 10.8% GDP 16.6% GDP
Japan 128 million €3.5 trillion 6.3% 16.8% GDP 15.3% GDP
Euro Formation
Comparison of Economies
Euro Formation
2 Causes
• Extension of 2008 global financial crisis
• Starting from Greece in 2010, the financial crisis spread rapidly to
Southern Europe, and finally to whole European countries
Greece Southern Europe
WholeEurope
Causes
PIGS (Portugal – Ireland – Greece - Spain)PIGS (Portugal – Ireland – Greece - Spain)
• Excessive sovereign debt
• Government budget deficit
• High unemployment
IncludingItaly
PIIGS
Causes
Deterioration of Economic GrowthDeterioration of Economic Growth
Why??Why??
Causes
Deterioration of Economic GrowthDeterioration of Economic Growth
Banking Crisis
Loss in securities investment/
collapse in real estate bubble
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Financial Crisis
Sovereign Debt
Crisis
Bailout on bank / deteriorated current
account / negligence on financial management
Insolvency of financial institutions caused byGlobal Financial crisis and following financialcrisis led to Euro-zone crisis
Causes
Economic recession, drop in tax revenue, deterioration of fiscal sustainability by Global Financial Crisis
Major European banks was placed in bankruptcy by credit crunch
Large scale cash infusion to prevent bankruptcy of banks
Increase in Financial deficit
2007 2009% of GDP 0.7% 6.3%
Causes
The vulnerability of financial management
Some Southern European countries are financially Vulnerable countries (PIIGS)
Tax basis is weak due to the underground economy
Government expenditure and welfare expenditure made things worse
Average ofOECD Greece
Causes
Institutional imbalance by European single currency
European Central Bank(ECB) is responsible for monetary policy
Meanwhile, fiscal policy is carried out by each country
Introduction of single currency without fiscal consolidation made imbalance among European countries worse
Not-working Currency mechanism
Causes
From Global Crisis to Euro-zone CrisisFrom Global Crisis to Euro-zone Crisis
Sub-prime mortgage in 2008 Crisis of European
financial institutionsWorld economic recession transmitted to real economy
Large scale reflation / Deterioration in financial sustainability
Fund collection from in-doubt countries ↑
Countries (PIIGS) with encountered
bankruptcy
Causes
Portugal Italy Greece SpainCountry Major causeGreece High fiscal deficit and high debt/GDP ratioSpain Property and construction sector funded by
foreign flowsPortugal High CAD (Current Account Deficit)Ireland Banking
Causes
Causes
Causes
Causes
3 Measures
How to reach settlement (Assistance to an individual country)
1. Fiscal Austerity
2. Debt Waiver
3. Official Assistance
Measures
1. First Stage (May 2010) *Example of Greece
Fiscal Austerity
• Reduction of fiscal deficit of GDP▲13.6% (2009) ▲ 8.1% (2010) ▲ 3 % (2014)
by raising tax, pension system reform, pay cut for government servant, etc
Debt Waiver • Nothing
Official Support • A €110 billion bailout by EU and IMF
Measures
2. Second Stage (March 2012) *Example of Greece
Fiscal Austerity
• Reduction of debt of GDP 120% (2020)
by pay cut of politicians, raising tax, etc
Debt Waiver• Voluntary 50% Write-off of Greek
debt by private investors (equivalent of €100 billion)
Official Support • A €130 billion bailout by EU and IMF
Measures
In addition to individual assistance to countries such as Greece, Ireland, and Portugal, 1. Rescue funding programs
2. Legislative measures
3. Improvement of the health of banks
How to reach settlement (Preparation for a next crisis)
Measures
1. Rescue funding programs
May 2010• European Financial Stabilization Mechanism
(EFSM) €60 billion• European Financial Stability Facility (EFSF)
€440 billion
July 2011 • European Stability Mechanism (ESM) €500 billion
May 2012 • Rise in lending capacity from €500 to €700 billion
Measures
2. Legislative measures (Fiscal Policy Agreement)
Dec. 2011
• “Six-Pack” in effect1) Strengthening of budgetary surveillance2) Enforcement of budgetary surveillance in EURO zone3) Speeding up the implementation of the excessive
deficit4) Requirements for the fiscal framework5) Prevention and correction of macroeconomic
imbalance6) Enforcement to correct excessive macroeconomic
imbalance in EURO zone
Jan. 2013• “Fiscal Compact” in effectIncluding rules such as balanced public finance to national legislative (if possible, constitution)
Measures
3. Improvement of the health of banks
EBA(European Banking Authority)
• Implementation of Stress Test• Set a target of capital ratio (Tier 1 ratio) : 9% by
June 2012
ECB(European Central Bank)
• Bond Purchase• Long-term Refinancing Operation
Measures
3. Improvement of the health of banksBond Purchase by ECB
(Source) ECB
Measures
3. Improvement of the health of banksLending outstanding of ECB to Banks
(Source) ECB
Measures
3. Improvement of the health of banksTrends of Euribor
(Source) ECB
Measures
4 Challenges / Future
Banking-ChallengesBanking-Challenges• The Crisis started in the banking
sector in US and hit the banking sector in Europe
• Use of derivatives rose from 2 ½ times world GDP in 1998 to 12 times world GDP
• Growth of Capital Markets banking led to re-hypothecation of the same collateral multiple times
• Countries with large capital market banks heavily exposed to Sovereign debt of EU economies
Universal/ Global Banking Size
Banking-ChallengesBanking-Challenges
Banking-ChallengesBanking-Challenges
Banking reformsBanking reforms
• Recapitalization of banks based on proper cleaning up of balance sheets where necessary
• Clear distinction between traditional and capital markets banking
• Basel II underestimated the risks that banks were exposed to
• Basel III implementation to help strengthen bank liquidity and reduce bank leverage
• Consistent and transparent accounting by the banks
• Banks should rely more on traditional deposits vs the wholesale funding to improve sustainability
Banking reformsBanking reforms
• Basel III is the global regulatory standard (agreed upon by the members of the Basel Committee on Banking Supervision) on bank capital adequacy, stress testing and market liquidity risk.
• Basel I and Basel II are the earlier versions of the same, and were less stringent
• Basel III released in December, 2010 is the third in the series of Basel Accords.
• Basel III seeks to improve the banking sector's ability to deal with financial and economic stress, improve risk management and strengthen the banks' transparency.
Banking reformsBanking reforms
Requirements Under Basel II Under Basel III
Minimum Ratio of Total Capital To Risk Weighted Assets (RWAs) 8% 10.50%
Minimum Ratio of Common Equity to RWAs 2% 4.50% to 7.00%
Tier I capital to RWAs 4% 6.00%Core Tier I capital to RWAs 2% 5.00%Capital Conservation Buffers to RWAs None 2.50%
Leverage Ratio None 3.00%Countercyclical Buffer None 0% to 2.50%
Minimum Liquidity Coverage Ratio None TBD (2015)
Minimum Net Stable Funding Ratio None TBD (2018)
Leverage Ratio-Systemically important Financial Institutions Charge
None 6%
Quantitative Easing-TaperQuantitative Easing-Taper
• Increased volatility-falling prices in interest rate sensitive assets
• Government debt service cost could rise substantially by upto 20%
• Household debt service cost could rise significantly
• Corporate profits will be under stress with increasing interest burden
• Capital outflows from the Eurozone to the US with a possible depreciation of Euro
• Investors in bond market could face large losses
Quantitative Easing-Ultra Low RatesQuantitative Easing-Ultra Low Rates• Banks & Insurance
companies to experience continued erosion in profitability with a compression in net interest margins
• Defined benefit-pension schemes would struggle to deliver on their commitment to retirees
• Increasing use of leverage with the return of asset-price bubbles
What Lies Ahead ?What Lies Ahead ?
• Austerity –fiscal consolidation and privatization
• Fiscal Union – allow ECB to float Euro Bonds
• Debt Mutualization- the crisis hit countries transfer debt to the rich countries
• Fracturing of the Eurozone
‘What I object to the current government intervention in so called solving the crisis, they haven’t solved anything. They have just postponed it’
- Marc Faber
‘The bottom line is that unconventional monetary policies that move away from repairing markets or institutions to changing prices and inflationary expectations seem to be a step into the dark.’
- Raghuram Rajan
‘The economic contraction is more severe after a prolonged period of credit expansion.’
-Prof . Vincenzo Quadrini, USC
Thank you!!Thank you!!