The European debt crisis began in late 2009 when revelations emerged that Greek government debt levels were much higher than originally reported. Several European countries, including Greece, Portugal, Ireland, Italy and Spain struggled with high debt levels that were exacerbated by the 2008 global financial crisis. While interest rates had dropped due to the Euro, countries like Greece and Italy took on large amounts of debt. Austerity measures have been implemented but growth remains low across Europe as countries struggle under high debt loads. The EU and IMF have implemented bailout programs but long term solutions around fiscal integration and stability remain works in progress.

1. EUROPEAN DEBT CRISIS
Tarun Chugh
Department Assistant
Hughey Center For Financial Services

2. History of the Euro zone
Maastricht Treaty Amsterdam Treaty
European Central Bank Euro Circulation

3. Countries in the Euro zone
Germany France
Italy Spain
Portugal Greece
Austria Netherlands
Slovakia Slovenia
Cyprus Estonia
Malta Ireland
Belgium Finland
Luxemborg

4. Big & Nuisance Players of EU
Greece, 1.9 Portugal, 1.4 Ireland, 1.3
Netherlands, 4.8
Germany , 20.2
Spain, 8.7
Italy, 12.7
France, 15.8
UK, 13.9

5. Conditions to be in the Euro zone
 Inflation in each country can only be 1.5% more
than the average of the 3 lowest nations
 Gross debt to GDP ratio cannot exceed 60%
 Government deficit to GDP cannot exceed 3%
 The interest for the zone cannot exceed more than
2% points than the average of the lowest three
nations

6. Initially Growth was Encouraging

7. Yields dropped and the party was on…

8. Reduced the cost of debt for weaker nations

9. Lowest yield for Italy was 3% Current yield is
7.28%

10. Stability of the Euro zone let weaker nations
Lever up…

11. Which they happily did..

12. H a p p y E u r o p e a n s !

13. Financial crisis and European debt crisis are
interlinked
 2008-2009 financial crisis dealt a heavy blow to the
European economy
 Leverage became a dirty word and it led to a crisis
of confidence the world over
“The ever-widening financial crisis has
shaken investors’ faith in the whole
system. People no longer trust
assurances that fancy financial
instruments will function the way
they’re supposed to” Paul Krugman 2008

14. Goldman Sachs deals with Greece
 Greece did deals with investment bankers to hid
its debt with the use of fancy derivative deals
 Greece used these instruments in early 2000s to
hid its debt to het entry in Euro zone
 The debt to GDP ratio reduced by 1.6% in 2001
 Full disclosure in 2010 led to the first $ 140 billion
dollars bailout plan (May,2010)

15. Euro zone GDP growth 2009

16. Europe Debt to GDP (2007)

17. Europe is highly leveraged…

18. Debt to GDP Ratio (2007)
Above 75%
Italy Greece Belgium
50-75%
Austria France Portugal Germany
Cyprus
25-50%
Slovakia Spain Netherlands
Finland
0-25%
Estonia Luxembourg Slovenia
Ireland

19. Debt to GDP Ratio (2010)
Above 75%
Belgium Italy Germany Greece
France Ireland
50-75%
Netherlands Spain Austria Cyprus
25-50%
Slovenia Slovakia Finland
0-25%
Luxemborg Estonia

20. Central
Central Problem
Problem
•Low Growth
•High Debt
Levels
•High
Unemployment
•Slow Decision
Making

21. Size of the Problem
Debt in trillions of Euro
Ireland
Portugal
Greece
Spain
Debt in trillions of Euro
France
Italy
Germany
0 0.5 1 1.5 2 2.5

22. Banks hold a bit of Greek bonds

23. But a lot of Italian bonds

24. Size of the CDS market

25. Why don’t the Europeans inflate the debt
away ?

26. Austerity its not over rated

27. Greece needs a haircut and badly

28. And maybe Italy does too

29. Actions taken till today
 European Financial Stability Fund with resources
of €780 billion
 50% haircut on Greek bonds which is an orderly
default
 20-30% guarantee on bonds of the peripheral
countries
 Calls for Eurobonds and closer fiscal union

30. Future scenarios

31. Dilbert’s take on Europe

32. Questions ?

33. References
 Washington post
 Reuters
 GMO
 World bank data
 New York Times
 Trading Economics