This action might not be possible to undo. Are you sure you want to continue?
EUROPEAN SOVEREIGN DEBT CRISIS WITH SPECIAL FOCUS ON GREECE‘S FINANCIAL CRISIS Presentation by: Devesh D Lalwani Aditya Vohra Srishti Kapoor Kunal Madan .
pushing many governments into default. and high levels of debt. low government revenues.INTRODUCTION • Historically. but the global recession endures. Italy. . As recovery from the global financial crisis begins. Greece & Spain. some point to the threat of a second wave of the crisis: sovereign debt crises. financial crises have been followed by a wave of governments defaulting on their debt obligations. • PIGS Countries -> Portugal. sharp economic downturns. • Financial crises tend to lead to. or exacerbate. widening government deficits.
EuroZone Countries having ‗EURO‘ as their primary form of currency. .
The Debt Crisis – Explained. ECONOMICS 101 If you are rich. you have to be really smart to get rich. you have to be an idiot not to stay rich & If you are poor. .
The PROBLEM .
he doesn‘t really get rich again.When a rich man gets poor. And hence. The current situation in the EU today. the status quo. .
.CAUSES • Manipulation of numbers to hide the reality • Too much dependency on foreign institutions to raise funds • Government driven crisis than a market failure • Failure of credit rating agencies to discover financial viability • So-called "carry trades" whereby investors borrow in currencies with low interest rates and invest in higher yielding currencies while mostly disregarding exchange rate risk. implied the spillover of global liquidity in European financial markets.
. Any assistance to Greece will come at a cost that will ultimately have to be borne by taxpayers in the nations that contribute. • Slower recovery The crisis is also set to slow down the embryonic economic recovery.Impact of Crisis • Impact on private individuals: The most obvious way would be through tax bills. • Reduced wealth: Take-home pay is likely to fall as it is eroded by rising taxes and everyone will have to work longer before they retire .by which time they are likely to find that their pensions have shrunk. as Europe agrees to ride to the rescue and help Greece deal with its mounting public and foreign debts.
• Contagion Effect Greek crisis has made investors nervous about lending money to governments through buying government bonds. Everybody's interest rates are heading higher as governments are having to pay a greater risk premium to borrow money. . As Greek 10-year bonds fall and yields continue to remain above 6%. Serbia. Bulgaria and Turkey have been adversely affected.• Spill-over effect: Some spillover effects have already started to manifest themselves. sovereign debt issuance and the risk premium investors demand to hold securities emitted by Romania.
WHAT COULD HAVE GONE BETTER? • No leadership from EU-level institutions -Countries acted unilaterally -Often felt they had no choice • Politicization of crisis management efforts -Coordination depended on political initiatives • Non-binding ex ante commitments of limited value –Domestic political incentives –Lack of expertise. notably among politicians –Practical difficulties and stress –Personality-dependent • Lack of a ―referee‖ or ―mediator‖ to help resolve disagreements between countries • Information sharing was a broad problem .
. It considers the period between 2010 and 2012. The EU-wide stress test is a tool designed to assess the resilience of European banks to external shocks.EU STRESS TEST • WHAT IS A STRESS TEST? • The European Banking Authority (EBA) released the results of EU-wide stress results on 15th July 2011. • Before we move ahead what exactly is a stress test.
• The stress test assesses what might happen to banks if external circumstances deteriorate markedly and helps to identify vulnerabilities and relevant remedial action. which a bank should hold to make up any losses. • In simple words it is the measure of a bank's strength to absorb losses in worst-case scenarios. such as GDP (which falls four percentage points) unemployment. and house prices and effects of other factors such as interest rates. . The benchmark for passing the test was that whether the banks have at least 5% core tier 1 capital. It includes a marked deterioration in the main macroeconomic variables.
Helaba. • Spain was the worst performing nation. • UK was the most impressive one with all the four banks passing the test comfortably. The failing banks are required to raise fresh capital by the end of this year. twelve are Spanish and four are Greek. Among those twenty- four failing or nearly failing banks. German bank. backed out of the test at the end moment potentially making it the 9th bank which is failing in the test.THE RESULTS OF THE TEST • Eight banks out of ninety banks from twenty-one countries failed to meet the minimum standard. • Sixteen banks barely passed the test with the ratios of between 5 and 6 percent need to improve their capital position by April 2012. These were followed by Spanish and greek banks. .
. Greece is witnessing one bailout package after the other.CONCLUSION AND CREDIBILITY • Investors and analysts claim that the test was not tough enough and failed to restore confidence in Europe‘s financial markets as the markets continued to plunge even after the results • One of the biggest drawbacks is that the test‘s worst-case scenario did not include the chance of a Greek default which can shaken the economic foundation of European countries.
• The EBA will publish two reports on the progress those banks make in February and July next year. . If these banks cannot raise the capital. their national governments may have to provide assistance to them.• The test had been a catalyst for pressure to raise capital as over the period of four months from the end of December to the end of April. banks raised around €100 billion of additional capital.
• Step 2: Solving The Funding Freeze European banks. first proposed by Morgan Stanley analysts. On 9 May 2010 the 27 member states of the European Union agreed to create the European Financial Stability Facility (EFSF). it is likely to be expensive. risk a liquidity crisis if wholesale markets do not reopen to them by autumn. That could choke off credit to the economy. has worked before. The solution is to repurpose Europe‘s sovereign bailout fund to inject capital directly into banks — much the same way America retooled its Troubled Asset Relief Program in late 2008. And even if they are able to issue longer term debt. The United States and several European countries restored calm after the collapse of Lehman Brothers by guaranteeing bank finances . especially those in Italy and Spain. a legal instrument aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The idea.STEPS TO SOLVE EUROPE‘S DEBT CRISIS • Step 1 : Solving the Capital Confusion Europe‘s weaker banks need capital if they are to be prevented from pulling the system down. The answer again lies in reinventing the stability fund to offer temporary financing guarantees. For this.
. the risk would be that sovereign-bank Codependency would re-emerge.• Step 3 : Preventing Bank Runs Even with capital and wholesale funding worries addressed. according to European Central Bank data. Preventing that from happening requires creditors to face real losses if a bank falls Over. Deposits at Greek banks have shrink by roughly 15 percent since the beginning of 2010. • Step 4: A Pan-european Regulator With Teeth If the first three steps were taken. with the Federal Reserve and the Federal Deposit Insurance Corporation overseeing the system with the help of regional bodies. Big lenders must also be structured so they can be safely wound down. But America provides a good model. savers would be more likely to stay put. Achieving that would require a single euro zone financial supervisor — something national regulators would no doubt resist. banks would still be vulnerable to a loss of confidence by depositors. But if there were a single pan-European deposit plan. but on a pan-European level.
large deficits and stagnant growth that plague the euro zone. How the EU & Greece are handling the crisis with the whole bail-out plan will reflect to what extent the EU is able to function on its own as a powerful economic entity. • These ideas would not instantly fix the sovereign debt. But removing banks from the equation would lift one large potential fiscal burden from governments.Conclusion • Greece‘s Debt Crisis has put the EU under the scope. & it has shifted the attention to the efficiency & the success of the Eurozone. It‘s considered as probably the biggest test the EU (& the EMU-in particular) has gone through. .