Our group was required to do a presentation for Financial Management on the Euro Zone Crisis. We took the example of Greece and did the study. Here are our slides.

1. EURO ZONE CRISIS

2. Euro Zone is an economic
and monetary union of 17
member states of
European Union (EU) that
have adopted the euro (€)
{
as their common currency.
Monetary Policy of the
Euro Zone is laid out by
the European Central
Bank (ECB) and fiscal
policy by individual states.
The euro was introduced
on January 1, 1999.
Background

3.  Single Market for free circulation of
goods, capital, people and services.
 Single currency to eliminate exchange
rate transaction costs and risks.
 Macroeconomic stability (e.g low
inflation) and financial integration of
the nations in the Euro zone.
 Each member country to become
stronger against other big economies.
Philosophy of Euro Zone

4. How Euro Zone Crisis
Started

5.  Transmission from the United States.
 Housing Price Bubble adversely affected the
highly leveraged banks in the Euro Currency
Zone.
 Governments in euro zones tried to prevent
collapse of financial system by bail out of
banks.
 This caused pressure on financial resources of
the governments and widened the gap of fiscal
deficits.
The Euro Zone Financial
Crisis

6.  BNP-Paribas forced to close funds in August
2007
 UK bank Northern Rock taken over by
government
 German state banks IKB, WestLB, BayernLB
and SachsenLB bailed out by government
 Irish banks given government deposit
guarantees
 Switzerland injects funds into UBS
 Iceland’s banks unable to roll over short term
borrowing, default on deposits of foreigners
European Financial
Institutions under Stress

7.  Continuous high % of debts to GDP
 Large welfare budgets
 High public debts
 High external debts
 Slow GDP growth rate
The major causes

8.  Portugal
Euro being a common
 Ireland currency, the crisis in
 Italy these countries badly
 Greece affected the economies of
 Spain
other euro zone countries.
Countries In Crisis

9.  Automatic stabilizers of falling taxes, rising
welfare and unemployment payments kick in as
incomes fall and unemployment rises.
 Discretionary fiscal stimulus enacted in most
countries, depending on their fiscal positions.
 European countries limited by Stability and
Growth Pact to 3% fiscal deficits, except in
time of “exceptional economic distress.”
Fiscal Policy Responses to
Recession

10. What happened in
Greece?
{ A study on Greece

11.  Greece has been living beyond its means since
even before it joined the euro.
 Income hit by widespread tax evasion.
 May 2010 – 110bn euros of bailout loans.
 July 2011 – earmarked to receive another
109bn euros.
 October 2011 – the Eurozone asked banks to
agree to a 50% "haircut" on their Greek
holdings, alongside an enhanced 130bn euro
bailout.
Why is Greece in trouble?

13.  2002 – Greece abandoned the drachma as its
currency in favour of the euro in 2002, making
it easier for them to borrow money.
 Greece went on a big, debt-funded spending
spree, including paying for high-profile projects
such as the 2004 Athens Olympics, which went
well over its budget.
 Prime Minister George Papandreou quit the
following year while negotiating the 110bn
euro bailout package follow-up.
 Lucas Papademos has negotiated a second
bailout of 130bn euros, plus a debt writedown
of 107bn euros. The price: increased austerity
and eurozone monitoring.

15. The Impact

16.  High interest rates on bonds
 High unemployment
 Foreign trade badly affected
 Exchange rate of Euro was adversely
affected
 Downgrading of rating of euro zone
nations
 Low confidence of global investors
The financial crisis caused slow down in euro
zone and global economy
Impact On Euro Zone

18. Credit in the Eurozone (% change)

20. Financial markets have become much
more reluctant to lend to euro area
countries . .
. . especially those with higher debt
and deficit levels:
 Portugal?
 Spain?
 Italy?
 Belgium?
This has led to sovereign debt crisis.
Where will it end?

21.  Negative impact on foreign
trade
 Impact on financial/ capital
market
 Slowdown in foreign remittances
and NRI deposits
 Impact on jobs of Indians in euro
zone countries
 Euro zone crisis would impact
global investor confidence
Impact On India

22. PSR
{ Possible Scenario and
Resolutions

23.  Once Greece defaults, banks having Greek
debt will be at loss
 Other countries will likely follow to default as
investors become worried about risks in the
region
 Portugal is most likely to follow, followed by
Irish Republic, Spain and Italy Generalized
Banking Crisis likely will follow
Outright Defaults by crisis nations

24.  De-evaluation of currencies of these nations
would be certain
 Collapse of financial system of these nations
 International creditors would incur huge losses
 Businesses would go bust and these nations
face high Inflation
 Mass emigration of skilled labor, towards other
EU countries
 New barriers to trade may come up
Greece and other crisis nations exit
the Euro

25. Creation of common euro bonds which
would allow weaker euro nations to
share credit rating of stronger nations
such as Germany and hence to borrow at
lower rates.
This is unlikely as why Germany would
guarantee debts of other nations.
Common European Bonds

26. In the past, ECB has bought bonds of
weaker nations.
However, it cannot do so endlessly. As it
would mean printing of new currency
and buy bonds , leading to an inflationary
flood of money, creating another crisis.
ECB buys bonds of weaker nations

27.  To allow euro zone crisis nations to
borrow at low rates with long maturities.
 For this financing is needed from
countries having a large foreign exchange
reserves such as China.
 Whether China would bailout euro zone
nations and to what extent , is to be seen ?
International Monetary Fund (IMF)
Rescue

28. Financial policy Regulation, Liquidity provision, State-contingent
supervision capital exit from public
(micro- and injections, credit support; audits,
macroprudentional) guarantees, asset stress tests,
relief recapitalisation,
restructuring
Monetary policy Leaning against Conventional and State-contingent
asset unconventional exit from
cycles expansions expansion,
safeguarding
inflation anchor
Fiscal policy Automatic Expansions plus State-contingent
stabilisers within automatic exit from
medium-term stabilisers, while expansion,
frameworks, respecting safeguarding
leaning against fiscal space sustainability of
asset cycles considerations public finances
Structural policy Market flexibility, Sectoral aid, part- State-contingent
entrepeneurship time exit from
and unemployment temporary support
innovation compensation

29.  Recently the Greece government has
approved tough austerity measures to get
bailout package from international
creditors.
 There are vast demonstrations in Greece
for reducing minimum wages & welfare
budgets.
 Bailout packages for other crisis nations to
be followed.
Recent Developments

31.  Previous economic crises in Europe have led
to large devaluations of currencies.
 Within Eurozone, single currency prevents
devaluation , provides automatic financial
support through capital markets.
 Non-euro currencies depreciated sharply in
2008, British pound sterling, Swedish kronor,
Polish zloty, Hungarian forint.
The Role of the Euro

32. Changes in Budget Balances

33. Greece’s Debt Dynamics

34.  Euro Zone crisis has been the combined result of US
financial crisis and excessive debts with slow GDP growth
rates.
 This crisis has badly affected the financial market, capital
market and global economy.
 The crisis nations are in bad shape and are looking for
bailout packages.
 ECB, IMF, International creditors and stronger nations are
considering various options to resolve the crisis.
 The situation is grim and there is no immediate solution to
the problem and it has long term affects on global
economy.
Conclusions

35. A presentation by
Tamrish Sinha
Ganesh Nagarsekar
Aniket Chaudhary
Kshitij Jain
Aniket Pant
Sameer Pendse
Kushal Khandelwal
Thank You