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What is the Eurozone Crisis ?
The European debt crisis is the shorthand term for Europe’s struggle to pay the debts it has built up in recent decades.
•“Inspiration for the € symbol come from the Greek epsilon … crossed by two parallel lines … to ‘certify’ the stability of the euro.A little History … •In the year 1999 .0 . “ •The idea was to Reduce trading costs Boost tourism Smooth the economy 3 Meliorate 2. Euro Currency was launched.
0 . 4 Meliorate 2.So what went wrong ? Most governments run a budget deficit. (They Spent more than they earned) Lack of strong political leadership in the past years has meant that the euro was not well supported by good fiscal and economic policies. This was a recipe for disaster. We had 17 countries all behaving differently without any real central fiscal control to ensure that no country was spending more than it was earning.
0 Portugal Ireland Italy Greece Spain *Together called as PIIGS countries.MAJOR DEBT RIDDEN COUNTRIES Meliorate 2. 5 .
0 6 .Debt by Jan 2012 Meliorate 2.
the governments of Greece and Portugal (among other offenders) have gotten used to spending a LOT of money. •When the financial crisis hit.0 7 . problems came to a head. however. Debt levels in Portugal. and Greece became unsustainable. Italy.A little Background … • Since joining the euro back in 1999. it wasn't a problem — banks and other investors were willing to lend them money on the cheap and their public sectors became bloated. and taxes in a contracting economy are no longer enough to pay the bills. When times were good. Meliorate 2.
and Ireland are still struggling to bring their public debt under control. the International Monetary Fund.A little Background … • Greece. the European Central Bank Meliorate 2. Portugal. and III. after receiving billions of euros in bailout aid from I.0 (the so-called troika) 8 . the European Commission. II.
The initial round of aid money helped these governments prop up their banks and pay their bills. EU leaders agreed in July 2011 that a "selective default" was the only option for Greece. Ultimately. and the country's private sector lenders agreed to take a loss — a "haircut" — on their debt holdings. Under this situation. Greece needed even more money to prevent an economic collapse. however. euro area nations guaranteed payouts on Greek sovereign debt.0 . 9 Meliorate 2.A little Background … These governments needed this money because it became too expensive for them to borrow cash on the open markets. with speculators demanding high rates for lending and traders even betting on a disorderly sovereign default.
No .0 . And borrowing becomes unaffordable And then the governments ask for emergency loans ! 10 Meliorate 2. Lenders need to believe that a country can repay its debt. Otherwise the interest rates soars.THE ROOT CAUSE OF THE PROBLEM ! If you think that the problem is about DEBT. its not just about the debt.
Portugal 78 bn euros July 2011 . Greece 110 bn euros Nov 2010 . Ireland 85 bn euros May 2011.EMERGENCY LOANS TAKEN BY GOVERNMENTS May 2010 . Greece (exact amount not known) 11 Meliorate 2.0 .
Contrary to popular opinion. but still couldn't pay its bills. Throughout the 1990s and 2000s. the U.THINGS YOU SHOULD KNOW ABOUT THE EUROZONE CRISIS Ireland was the first to falter The Euro crisis has been rumbling on for a couple of years now as the number of countries being perceived as having a major debt problem has increased. and wealthier members of the Eurozone have bought Irish government debt to help support the troubled Emerald Isle. Then the Irish government slashed public sector spending. Ireland had a booming economy.K. 12 Meliorate 2.0 . the first country to slide into crisis wasn't Greece but Ireland. the Irish were particularly hard hit. As a result. The country rapidly fell into recession and the government suddenly needed to borrow much more to keep going. So when the global financial crisis hit. but it relied on massive levels of personal debt and an overinflated housing market. Housing prices plummeted and banks stopped lending.
financial institutions and pension funds.THINGS YOU SHOULD KNOW ABOUT THE EUROZONE CRISIS The power of the ratings agencies Governments around the globe issue trillions of dollars of debt each year. This debt is bought by private investors. But how do you know good government debt from bad? That is where credit agencies like Moody’s and Standard & Poor’s step in: They assess government debt for its safety and give it a rating (AAA being the safest while BBB is the weakest). Meliorate 2.0 13 . Many have criticized the ratings agencies for being harsh on Eurozone countries as a strong economy like France recently lost its AAA rating.
but it may not last. Meliorate 2. In 2011. and its economy is still sluggish. the U. the Eurozone accounts for the majority of Britain’s overseas trade and many British banks hold billions of government debt from Eurozone countries.K. Britain is threatened by the Eurozone crisis. 14 .K. As a result. Meanwhile.THINGS YOU SHOULD KNOW ABOUT THE EUROZONE CRISIS The crisis could spread to the U.0 As of this writing. the UK may be as a safe haven to international investors. government borrowed more than the Greece.
000 private swimming pools).0 . Membership to the Euro is preventing Greece from devaluing its currency to make exports cheaper and to increase tourism. there are only a handful of people registered as millionaires for tax purposes in Greece but 250.THINGS YOU SHOULD KNOW ABOUT THE EUROZONE CRISIS Greece’s problem is bigger than Euro membership Nearly every economist has their own crazy story about the Greek economy (for example. The Greek government finds it impossible to collect the taxes that it needs to keep a lid on public spending. Tax evasion and corruption in the public sector are endemic in Greece. 15 Meliorate 2.
Germany is the powerhouse of the Eurozone.0 With Europe’s biggest population. but they do not want to spend their hard earned money bailing out the weakest links in the Euro. However. No wonder. that other members of the Eurozone look to Germany for help. 16 . the German people back the continuation of the Euro.THINGS YOU SHOULD KNOW ABOUT THE EUROZONE CRISIS Germany is the key player in the Eurozone Meliorate 2. economy. therefore. and healthy government finances.
which were on the edge of collapse. That’s a mind boggling sum and much of it was funded by governments around the globe borrowing in order to pump money into their banks.0 . economies around the world fell into recession and tax revenues collapsed. At the same time. 17 Meliorate 2.THINGS YOU SHOULD KNOW ABOUT THE EUROZONE CRISIS The global financial crisis helped cause the Eurozone’s current problems The final cost of the global financial crisis of 2007 and 2008 has been estimated at $3 trillion. A big financial black hole was created and it still hasn’t been filled — if anything it’s getting worse.
A big financial black hole was created and it still hasn’t been filled — if anything it’s getting worse. economies around the world fell into recession and tax revenues collapsed. That’s a mind boggling sum and much of it was funded by governments around the globe borrowing in order to pump money into their banks.THINGS YOU SHOULD KNOW ABOUT THE EUROZONE CRISIS The global financial crisis helped cause the Eurozone’s current problems The final cost of the global financial crisis of 2007 and 2008 has been estimated at $3 trillion. At the same time. 18 Meliorate 2. which were on the edge of collapse.0 .
19 Meliorate 2. personal debt levels are actually higher in these countries than the Eurozone. Italian.K. Your average French. This has prompted some observers to suggest that the ratings agencies got it wrong to give France a lower credit rating than the U.K. and U.S.0 .A. are higher than the Eurozone Because of Britain and America’s addiction to credit cards and borrowing to buy property.THINGS YOU SHOULD KNOW ABOUT THE EUROZONE CRISIS Debt levels in the U. and even Greek person are far less indebted than most Brits or Americans.
0 . Foreign institutional investor (FII) investment pattern is marked with high volatility. A surge in FII investments will lead to increased inflationary pressures and building of an asset bubble that could burst anytime. India is grappling with high inflation and the central bank has raised the key interest rates a dozen times in the past year and a half. A sudden surge in investment pattern is as detrimental as an unannounced withdrawal.HOW WILL THE EURO ZONE CRISIS IMPACT INDIA? Capital flows into the economy and exports are likely to take a beating. 20 Meliorate 2.
HOW WILL THE EURO ZONE CRISIS IMPACT INDIA? A slump in domestic industrial growth. metal. A series of scandals emerging from under the carpet have diluted the faith of foreign investors. FMCG and healthcare took a beating. oil and gas. Sectors across the board including auto. The risk associated with otherwise favorite sectors such as banking has increased. The market volatility has compounded with the concerns of small investors. unaddressed agricultural woes. 21 Meliorate 2. Concerns are the current European financial crisis will curb economic growth. rising interest rates and escalating fuel costs have compounded the global factors.0 .
THANK YOU! 22 Meliorate 2.0 PGDIE-41 .
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