European Crisis

The financial recession started because of the belief that asset prices, such as property, shares and funds, would continue to increase. Companies, banks and households fell into this trap, taking on increasing levels of debt to finance these assets, but at some point the prices stopped increasing. Realising that returns would not be made, mass selling began driving the value of assets even lower, while the value of the debt remained the same. Soon, many investors were in the position where the earnings from their assets were not enough to pay the interest on their debts and were forced to default on their loans, thus causing a loss for whoever had lent them money, usually the commercial banks. But some companies, and the banks themselves, are considered too important to default and collapse and in this case that government steps in to ³bail them out´. Government does this by paying their debts for them and in doing so transfers this debt to their own account. Now it is up to government to find the finance to pay off these debts, as well as their own, and if they cannot do so they themselves run the risk of defaulting and needing to be bailed out. This is the problem currently facing the EU. Greece, Portugal and Ireland have already been bailed out once by the European Financial Stability Facility (EFSF), a fund paid into by other EU countries and used to provide financial assistance to countries in need. But this fund is running out of money and the more stable EU countries are refusing to contribute. They have agreed on a $179 billion bailout package for Greece, without which it is likely to default by mid-December, but Greece is just the first in the line, with Italy, Spain and possibly Portugal again requiring such assistance ± or facing not being able to pay their creditors or wage bills. Government-backed financial assets, mostly in the form of bonds, are considered to be the safest place to store money as they are a ³risk-free´ holding (meaning you are guaranteed to get your money back). But if any of the EU countries were to default, and bond holders to accept only some or none of their investment paid back to them, this perception would change completely. As government bonds become more risky, the interest paid on these bonds (interest payment from the government to the person who bought the bond) increases to compensate investors for the risk. Already highly indebted governments will now need to pay more in order to service their loans, thereby increasing their spending and making them an even higher default risk. While bailout packages and increased money may help to patch the immediate crisis, the only way out of this for the EU economies is to start reducing their debt and balancing their books. Money spent now is going to be used to pay for growth in the past rather than for encouraging future growth, and the EU economies are likely to stagnate for many years to come. But South Africa is in a far luckier position ± we can choose now whether to continue spending money we don¶t yet have and end up in a similar position, or to follow more prudent policies and encourage saving and growth based on real earnings. We do not have problems of defaulting banks and bailed out companies, but with some studies showing up to 95% correlation between South African growth and foreign economic success, and the Treasury promising to reduce spending to balance the budget, money is going to be scarce. What Europe has taught us is that the solution is sensible spending and innovative ideas, not borrowing.

FDI in retail: FDI in India: Retailers, farmers face uncertain future
AP Dec 1, 2011, 12.25pm IST,The Economic Times MUMBAI: Ashok Kokane sits amid his strawberries at Mumbai's Crawford Market, a handwritten ledger across his knees and a fan of dirty 10 rupee notes at his hand. The lazy, dust-encrusted ceiling fans above are far past cleaning. There is a sense of timelessness here, in the lurking cats, the shiny shrine to the fearsome Hindu goddess Durga and the cry "Porter? Porter?" sent up by skinny boys with frayed baskets on their heads. It is a tableau many fear will disappear after the government's decision last week to give foreign big box retailers like Wal-Mart greater access to India's huge market. "When big man comes, small man goes," Kokane said. The arrival of modern retailing would hasten a cultural transformation in the way Indians shop and work. The debate now raging - which has shut down Parliament - hinges on competing visions of what foreign retailers will mean to agriculture and retail, India's two largest sources of jobs. The government argues organized retail will make food cheaper, liberate millions from medieval working conditions and put more money into the hands of desperate farmers. Others say it will deepen the inequities of Indian society and wipe out a merchant class whose values and skills have been passed from father to son for generations. The existing retail landscape is an intricate tangle of shops and bazaars, forged by ideas that date back to India's earliest religious texts. But, even without Wal-Mart, small, family run shops are already under threat. With the

pasta infested with bugs and icy $12 pints of Haagen Dazs. Food accounts for about 70 per cent of the retail market. most people who now do not find the once perceived value in these entities default. have been involved in the same business for many generations." Singhal said. investment and government spending. have struggled to hire one well-trained. People who cannot afford such products/services are provided credit in order to fulfill their newly created aspirations. India's market and roadside stalls employ. they can get it in a day or two. organized retail accounts for just 5. The ministry predicts modernization will create some 10 million new jobs in areas like food processing and transport. and the growing dreams of India's youth for better paid. pushing more of them off the land with few tools to forge a better life elsewhere. When an economy faces a slowdown. organized players. If anything.and cheaper for the retailer. If you're short money.´ What are your views? Developed markets grow at a lower rate as compared to the developing economies." said Arvind Singhal. ³Rampant consumerism (seeking material goods without the ability to afford them) is one of the main causes for the current global economic crisis. more than 600 hypermarkets opened between 1996 and 2001 but the number of small stores grew too: from 1. their real value (not the aspiration one) falls since the aspiration dies for the now mass-entity." Far better . net exports. who has been writing about rural India for 18 years. "The traditional retailer in India can offer better value than some of the large. chickens and pretty much anything else. armies of slim men pedaling rusted bicycles stacked improbably high with eggs for delivery. P. which Technopak expects will hit $675 billion by 2016. according to Technopak. he said. believes big retail won't heal the inequities of rural India which have driven over 250.fraying of caste ties. more prestigious jobs. "You have different sets of people who.5 per cent of India's $470 billion retail market. consumers start cutting on spending. If you want a fistful of flat-leafed parsley or a special pan. the low credit worthy people. Every period of boom in the economy is eventually followed by a slowdown. They run up dark staircases offering fresh rolls wrapped in newspaper and carry cases of bottled water on their heads two and three at a time. More so. decently paid person than five low paid workers and spur a virtuous cycle of rising productivity and increased consumption. people create value for products which does not exist in reality. a fear of recession grips the market. Such overvalued products grow exponentially in demand in such economies driven by consumerism. because of the caste system. he argues . which often determine a family's profession. you can pay next time. bundled with a nice human touch. The Ministry of Commerce noted that in China. . They say the more open policy will drive down skyrocketing food prices and help millions of farmers get more money for their crops by eliminating waste and middlemen." Today." Singhal said. In such cases. "People are hardly getting money for those jobs. Every organized urban household has a raft of phone numbers for home delivery of cat food. Others say the changes will hurt small farmers at the backbone of India's rural economy. Hence we see. This leads to a vicious cycle of less consumer-spending and higher government spending to compensate for lower consumer spending. who usually are granted larger credits due to their higher interest rates. it will make them worse. a New Delhi based consulting company. These days. taking the economy further down into recession. at backbreaking rates. The best local shops are marvels of service and quality.000 farmers to kill themselves since 1995. Y= C+I+G+X. "No one benefits from this kind of employment. If this downturn makes the economy's GDP growth negative for two or more consecutive quarters. Godrej's Nature's Basket and Tata's Westside. instead of spending more to increase GDP by increasing consumption. Many argue that retailing in India is not yet a zero-sum game: Demand is growing fast enough that big and small players can thrive side by side. at exorbitant prices.9 million to over 2. the economy is said to be in recession. these overvalued entities reach a large volume. "A shopkeeper's son may not be a shopkeeper. he said. Restraining consumerism remains a key task for developed countries like the US and Western Europe. rotten dairy goods. as well as in the new retail outlets. like Reliance's Fresh. Shoppers sometimes put back items because the clerk can't figure out how to get his computer to register the bar code. Yet there are severe drawbacks to the system. toilet paper. it¶s the credit agents which promote out of pocket consumerism and the agents who create fake aspiration valued entities make the economy falter. default more! The economy takes a downturn! ³Economies cannot always grow. founder of Technopak Advisors. repeatedly thawed and refrozen. Existing domestic supermarkets. Hence. Sainath. Stocking irregularities mean those last cans of Italian plum tomatoes might not be replaced for a month. In order to generate additional returns on the bucks invested. Some sell. retailers are finding it hard to keep the next generation in the family business. When. Such a downturn acts as a checkpoint for the economy and rings alarm bells for investors.´ A country's GDP(Y) is a function of consumption.5 million. consumerism is not the root cause for a fall in economy.

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