The impact of Europe debt crisis on the world economy

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Assignment of Banking and Finance


The impact of Europe debt crisis
on the world economy

Assignment of Banking and Finance.
Pham Thi Hong Nhung BA 09028

Luong Viet Thai Hung BA 10008
Quan Dieu Anh TH 09008
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Table Content
I . I ntroduction..2
I I . I mpact on the world (USA, Europe, J apan and Asian financial markets)...4
I I I . Possible impact on Vietnamese Financial Market and Economy .10
I V. Conclusion13
V. References14























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I. Introduction:
Europe Debt Crisis has become the biggest threat to the global economy. International Monetary
Fund (IMF) confirmed most disturbing areas of the global economy today is Europe, where the
debt crisis and the financial problems of banks to disrupt the financial markets.



First of all, Greece has been widely recognized with a debt US $ 236 billion, of which 75 billion
debt France, 45 billion debt Germany and 15 billion debt UK. However, this block has not
seeped into where compared with the two neighboring countries are also on the crisis such as
Spain and Portugal. Spanish debt totaling US $ 1100 billion, i.e. more than four times the debt of
Greece, including 238 billion for Germany, 220 billion to 114 billion with France and Britain.
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This country is the unemployment rate is 20% and the economy is almost the weakest continent.
Portugal debts total 286 billion dollars, of which one third debt Spanish (86 billion), debt
Germany 47 billion , debt France and Britain 24 billion and 45 billion, etc. According to
analysts, the debt crisis could create a "domino effect" in Europe as banks in the region have
close ties with each other. In addition, the European banks also hold a volume of government
bonds due in large countries in the circulation area. (Vietnam and International News)

So far, it has been affecting to the European Union
members, such as: Germany and France will have
to share the burden of huge bailout for the
difficulties members of the community, so
resources for their domestic policies will be less.
About banking industry is a sharp decline. Banks
in Germany, Britain and France, now stick to the
huge amount of money they think is debt security.
So, Europe Debt Crisis has the blasting power to
cause a new round of bank panic. Recognizing this
problem the bank may require government aid.
That is why the crisis presents a challenge to the UK, Germany and France. Especially at this
time cannot exclude the case of the debt crisis of the Southern European countries could spread
into a financial crisis new world, due to the insolvency of the financial market in Europe with
swap contract the credit risk (Credit Default Swap - CDS). The economic recovery became
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uncertain, global economic was slowdown, particularly when the unemployment rate to rise
again near the two times. Other countries has been affected with suffering the big deficit such as
Italy (12%), Spain (11.2%), Portugal (9,4%) in 2010. (International Finance News )

Vietnam's economy has pretty deep integration into the world
economy, reflected in the rate of import, export and foreign
investment flows into Vietnam rather high percentage. With what has
and is happening, Vietnam will be affected to certain import and
export activities, investment flows directly and indirectly. In addition,
exchange rate stability and psychological well on the stock market is a
challenge. Expansion of public spending are also putting pressure on the budget deficit problem
of Vietnam. Growth model relies heavily on external sources of capital become vulnerable if the
global economy has stalled. (Crisis News Forum).

II. Impact on the world (USA, Europe, Japan and Asian financial markets)
In November 2009, Greek Finance Minister announced that the fiscal deficit for 2009 would be
12.7% of GDP, more than double previous (6%), and four times higher than permitted level of
Eurozone (3%). Psychological crisis began to appear on the market. The Greek government
declared that if they do not receive any aid before May 2010, they will have no way to repay
debts worth 20 billion euros coming due. For the loans from 300 to 400 billion euros, people
thought Greece may violate agreement for loan , investors began selling off bonds Greece, it
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made the government cannot issue new bonds to get money to pay old debt. Debt crisis of the
Greek outbreak. (The Euro price decrease)
The cause is derived from Greek, which has the highest level of debt in Eurozone, it was 144%
of GDP in 2010. When the cash flow came into Greece massively, of course they may know
what they have to face, it is escalation of prices of Greece is stronger than others countries in
Europe. And deflation increases the debt, which showed the weaknesses of the Eurozone (the
common currency, but independent of fiscal policy). (The Euro price decrease)

Easily to see the consequence that how much debt increase, the angry wave of people also
increase . The strikes and protests to cut wages and pensions paralyze the operation of many
companies in Portugal. Italy and UK students protest to reduce budget of education. It made
Europe really faces a debt crisis of the century.



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Following Greece, Iceland
actually need 130 billion euro to
be able to overcome the serious
budget deficit (expected in 2010
may exceed the threshold of 32%
of GDP, more than 10 times the
permitted level of the Eurozone),
and revive the fragile banking
system. When the "financial disaster" of Ireland has not resolved yet, some countries in
Eurozone and ECB advice Portugal should ask the aid from IMF. Spain also appeared real estate
bubble and the debt situation of private enterprises increased rapidly. After the real estate bubble
burst, the Spanish economy came into recession, and has to face unemployment rate (from 2007
to now has more than doubled, to nearly 20%). According to incomplete statistics, the total
public debt of Spain up to nearly 1,000 billion dollars (about more than 3 times Greece's debt),
and the debt of the private enterprises get the same number. Following the domino effect, the
next country is Italy. According to latest statistics of Italy's central bank announced the debt of
this country is more than 1840 billion euros. (News Finance world ) (The Euro price decrease).

Europe has to face with unemployment and high inflation, depreciation of the euro, GDP growth
declined, as real incomes of the people as well as demand for imported goods dropped sharply,
which affected negatively the exports of countries and regions close to Europe. In addition, the
debt crisis in Europe makes money come to secure shelter, particularly precious metals like gold,
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can make stocks, bonds fell, causing for attracting
investment capital from countries become more difficult.
Mike Daly, an expert on gold, said: "Gold prices are
affected greatly by the dollar and euro. Session at the time,
the dollar is weak, but after dollar be strong again; gold
prices evaporated". (The Euro price decrease)

It was strange that the economy of Asian countries is stronger than the aging industrialized
countries of Europe. Asian countries have almost no debt, surplus in the budget, and trade
balance. Unlike other European banks, the banks of these countries are not attracted by the real
estate, and financial products. Thus, Asian countries do not have to worry about the crisis in
Greece, or afraid too much about the evaluation of the financial appraisal organizations such as
Standard and Poor. (International Finance News )

The Euro price continuously decrease . A big question is how it impact on the US economy? The
Euro was down to its lowest level in four years against the Dollar. The euro has depreciated 14%
against the dollar. Inflation rate is too fast and too big, so some experts did not hesitate to predict
that the euro will be given "parity" with a dollar in the near future as well. Not only the stock
market, but also many other sectors of the global economy are affected.. EU is still remains the
address of US exports in 2009, although affected by the crisis, however it is not as strong as
exports to Canada, and China. If this trend continues, many American companies operating
mainly in the EU will take a lot of damage. It may make goods originating from EU cheaper
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(because of the weak Euro) and American goods competitive not only more difficult in the EU,
but also global market. Ian Shepherdson concluded: "A further decline in Europe not only
prevent, but also worsen the full restoration of US economy." (Europe's Debt Crisis affect US)
Because of relying less on investors bond internationally, the Japanese government is expected
to meet the challenge only in matters of debt when domestic investors are no longer indifferent to
bonds issued by Tokyo. According to data of the Central Bank of Japan (BOJ), only 6.4% of
outstanding government bonds are held outside the Japanese borders. Thus, the liquidity has also
been made easy without depending much on the situation of supply and demand in international
markets. For investors, the Japanese government bonds are still attractive. (World Finance)

Impact on banks in the world famous:
Concern about the situation in Europe has been clearly reflected on the Chicago Mercantile
Exchange (CME), where the Euros contract get 60 billion euros, gain 71% over the same period
last year. (EU Crisis)

Although the European Central Bank (ECB) has attempted to offer a variety of measures such as
spending a large amount of money to save the euro by buying government bonds from
commercial banks, maintain low interest rate at record 1%, extending the program of emergency
financial assistance for low-cost commercial banks. However, the debt crisis of Europe after a
year is not possible to change direction. (EU Crisis).

Caja Madrid- the second big savings bank of Spanish, needed to receive government aid worth 3
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billion euros to overcome difficulties caused by bad loans originated from the collapse of the real
estate market. A month earlier, Caja Sur, a bank credit nature area with a history of 146 years has
been took over by the Central Bank of Spain. In order to avoid the possibility of bankruptcy, 45
banks will be consolidated into 15 banks. The collapse of the savings banks Spain will cause
serious consequences, including economic and social stability because the total asset value of
bank credit accounted for 40% of total banking assets in Spain, and total debts of these banks
accounted for 48% of the total debt of the Spanish banking sector. Meanwhile, according to
Francisco Gonzlez, BBVA Chairman, one of the top 10 banks in Spain, the international capital
markets had closed for the majority of companies and financial institutions Spain. (EU Crisis)

On the European scale, many banks are facing interest rate for interbank lending increased, the
ability to recover the debt from the bonds become fragile and less liquidity situation. With banks
facing difficulties in capital, the situation has become worse under the impact of the budget crisis
is spreading across Europe. According to the financial analysts famous Chinese Do Kien Huyen,
by the end of 2009, the European banks holding public debt and private debt of Greece, Portugal
and Spain of price to 1,300 billion dollars. If additional debt of Italy and Ireland, the total amount
that PIIGS countries (countries in
Europe, with a high ratio of foreign
debt, including Portugal, Italy,
Ireland, Greece and Spain) the debt
European banks worth up to over
2800 billion dollars. (EU Crisis).
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III. Possible Impact on Vietnam Financial Markets and Economy.
Export will suffer:
The export industry in Vietnam will be affected in 2 different ways. First of all, the debt crisis
will curb the economic growth of European countries. As a result, the marginal propensity to
consume is going to decrease because European in uncertain about the future so they tend to save
more. This reduction in consumption also decrease the need for exported products and contract
the market of European countries. Finally, the demand for products imported from Vietnam will
shrink. This event will be very disastrous to the exporting Vietnam enterprise, which is operated
to export goods.
Secondly, because of the depreciation of the Euro, the other currencies become stronger. Most
export contract is denominated by the US Dollar. Since the Euro is weaker and the US Dolalr
becomes stronger, the cost of importing goods from Vietnam is higher for Eurozone and a lot of
contracts has been delayed or renegotiated due to this issue. We offer products with prices in
dollars but now that the dollar has strengthened while the euro has weakened, our EU partners
want lower prices. Therefore, negotiations on contracts for seafood exported to the EU have been
delayed, Truong Dinh Hoe, general secretary of the Vietnam Association of Seafood Exporters
and Producers (VASEP) said. (News of Saigonmoney)
The Price of Gold will increase due to the capital flight from stock market:
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The gold price act as a confidence index. If people are uncertain about the future and do not trust
the national currencies, they can trade these currencies for gold to store their value, wealth as
well as purchasing power. While the value of Euro is still a question mark, the demand for gold
will increase so the gold price will in turn increase as well. The gold price is now currently
traded at 1,427.90 US Dollars per ounce. (Update Gold Price )
However, gold acts as an alternative for securities such as stocks and bonds. The more money
people put on to hold gold, the less money they have available to channel into securities market.
As a result, the bearish market will dominate.
The cost of issuing debt increase:
Because of concern about sovereign debt default, the cost of issuing bonds is much higher. The
Vietnam national debt relative to GDP is about 53.50% (2010) (List of sovereign state by public
debt), and we also experience budget deficit. Vietnam state deficit reach 0.46% GDp in 2010.
(Investment News). As a result, foreign will be more cautious to invest in Vietnam. It also make
it more costly for the government as well as businesses to issue bond because they must offer
higher yeild to attract buyers. However, this effect is not so strong because the forecast growth is
relatively high (6%) . High economics growth means high tax receipt so Vietnam has money to
pay off its debt and the sovereign default risk is very slight.
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Vietnam businesses must bear high interest rate:
Due to inflation pressure, the interest rate in Vietnam is very high in comparison to the rest of the
world. While many central banks in developed countries have been maintaining the historic low
interest rates in order to stimulate the economic recovery, the prime interest rates in the US, UK,
Japan and the Euro zone are one percent or less (News of Saigonmoney), the State Bank of
Vietnam has to fix a 14% interest rate ceiling (including promotions) for dong deposits,
Certificates of deposits (CDs), promissory notes, bill exchanges and bonds (News of
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Vietnambusiness). This actions aims at preventing the unstable interest rate market. However,
high inflation benefits savers but hurts borrowers. Businesses are experiencing a hard time
mobilizing money from the bank. In the long term, this situation can lower the economic growth
and have a bad impact on the Vietnam economy.
Foreign exchange rates have become unpredictable
The Euro s debt crisis shake people confidence. As a result, the confidence on the Euro will
decrease. It leads to a depreciation on Euro value and an appreciation on other currencies. The
Vietnam Dong will also depreciate so it will create hardship for businesses deal with foreign
partners because of uncertainty. In addition, the appreciation of US Dollar over Vietnam Dong
also create pressure on foreign currencies reserves as well as foreign exchange availability. The
government can take serious actions to intervene the foreign exchange market to maintain
liquidity in the market.
IV. Conclusion:
This crisis test for linkage of Europe and posed a question about the future of this volume. The
financial crisis and the Eurozone economy forced to rethink the monetary system, find defects
and fix weaknesses will help the Euro stronger.





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V. References

Bibliography
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http://www.thesaigontimes.vn/Home/thegioi/ghinhan/44654/
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probably-or-maybe-not/
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rticleId=43727&AspxAutoDetectCookieSupport=1
Investment News. (n.d.). Retrieved from ITPC Vietnam Government:
http://www.itpc.gov.vn/investors/news/2010/12/2010-12-
03.444640/MISNews_view/?set_language=en
List of sovereign state by public debt. (n.d.). Retrieved from Wikipedia English:
http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt
News Finance world . (n.d.). Retrieved from VnEconomy:
http://vneconomy.vn/20100304030933296P0C99/khung-hoang-no-tai-chau-au-dau-la-chien-
truong-ke-tiep.htm
News of Saigonmoney. (n.d.). Retrieved from Saigonmoney:
http://www.saigonmoney.com/2010/05/21/falling-euro-affects-vietnam%E2%80%99s-export-
to-the-eu/
News of Vietnambusiness. (n.d.). Retrieved from Business of Vietnam in Asia :
http://vietnambusiness.asia/credit-institutions-not-allowed-offering-deposit-rates-over-14/
The Euro price decrease. (n.d.). Retrieved from Vitinf- Take note finance history:
http://vitinfo.vn/MMuctin/Kinhte/LA83644/default.html
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Update Gold Price . (n.d.). Retrieved from Gold Price: http://www.goldprice.org/
Vietnam and International News. (n.d.). Retrieved from Finance Vietnam: http://fpts.com.vn/vn/tin-
tuc/quoc-te/2010/12/3b9d2302/
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cong-Nhat-Ban-bat-thuong-994/