CASE STUDY ANALYSIS ON

EUROPEAN DEBT CRISIS

SUBMITTED TO- DR. MANASI GORE
MADE BY- ARADHANA SHUKLA
NAGESH
JOSEFINA
POONAM PARDEHSI
BS EKNATH
 Introduction of European debt
Crisis
• European countries experienced the collapse of financial institutions,
high government debt, and rapidly rising bond yield spread in
government securities .
• The European Sovereign Debt Crisis started in 2008, with the collapse
of Iceland banking system, and spreads to primarily to Greece, Ireland
and Portugal during 2009. It has led to a loss of confidence in
European businesses and economics.
 Causes of this crisis
• The great recession of 2008 to 2012 ,
• The real estate market crisis
• Property bubbles in several countries
• Ballooning public debt etc.
• High fiscal deficit
 Rescue of the crisis
• By the end of 2009, the peripheral Eurozone member states of
Greece, Spain, Ireland, Portugal, and Italy were unable to repay
their beleaguered banks without the assistance of third party.
• This third party assistance included the European central bank, the
IMF and European financial stability facility (EFSF). These
entities purchased the government bonds of the weak nations and
provided trillions of dollars of loan at 1 percent interest.
Causes of the debt crisis of the economy
• External factors
of Greece
• a) Being a member of the Eurozone
• Internal factors
• Large fall in interest rates
• poor GDP growth
• Current account deficits
• Excess government spending
• Government debt
• Tax avoidance
• Data credibility
Being a member of the Eurozone
• Before Greece joined the eurozone, investors treated it as a credit risk
country.
• After Greece joined the eurozone, investors began lending to Greece at
about the same rates as they lend to Germany.
• Faced with this sudden availability of cheap money, Greece began
borrowing like crazy.
• And then when it couldn't pay back its debts Germany and other eurozone
nations weren't willing to bail out Greece.
 Large fall in interest rates
• After joining the Eurozone Greece was perceived as a safe place to invest, which
significantly lowered the interest rates the Greece government was required to pay.
• These lower interest rates allowed Greece to borrow at a much cheaper rate than before
2001.
• Greece began borrowing more
• When it couldn't pay back its debts that led the market to panic around 2010
• Interest rates on Greece debt increase again
• Those high interest rates make it impossible for Greece to borrow
• The financial markets no longer see Greece as debt-worthy.
• No one wants to lend to Greece at reasonable rates, so Greece can't keep paying to service
its current debts while carrying out basic government functions.
 Poor GDP growth

• The global financial crisis had a large

negative impact on GDP growth rates in
Greece.
• Two of the country's largest earners, tourism
and shipping were badly affected
 GDP growth rate
15

10

5
growth rate

0 GDP growth
1950 1960 1970 1980 1990 2000 2010 2020

-5

-10

-15
year

• Data source: https://data.worldbank.org

 Current account deficits
• Giving up independent monetary policy meant that Greece lost
the ability to devalue its currency relative to that of
Germany’s.
• This served to worsen Greece’s trade balance, increasing its
current account deficit.
• While the German economy benefits from increased exports to
Greece.
 Excess government spending
• Government primary expenditures increased by 87% against an increase of only 31% in
tax revenues (European Commission Report, 2017)
• Tax avoidance
• In Greece, tax receipts were consistently below the expected level.
• In 2010, estimated tax evasion losses for the Greek government amounted to over $20
billion.
• Estimates indicated that the government collected less than half of the revenues due in
2012.
• Data for 2012 indicated that the Greek shadow economy from which little or no tax was
collected, was 24.3% of GDP (IMF report, 2014)
 Government debt

• The debt increased in 2009 due to the higher than expected

government deficit and higher debt-service costs.
• After 1993, the debt-to-GDP ratio remained above 94%.
• The crisis caused the debt level to exceed the maximum
sustainable level (defined by IMF economists to be 120%)
 Data credibility
• Problems with unreliable data had existed since Greece applied for
Euro membership in 1999.
• The misreported data made it impossible to predict GDP growth,
deficit and debt.
• Data problems had been evident over time in several other
countries, but in the case of Greece, the problems were so persistent
and so severe.
HOW IS INDIA ASSOCIATED WITH THE EUROPEAN
DEBT CRISIS?
The growth process in the India slow down during 2008-09 as a
consequence of the global recession. The slow recovery in the united
state and the stagnation in the European countries has contributed to the
growth slowdown of Indian economy.
• The value of rupee falls
• The slowdown in the economic growth
• Negative effect on Indian exports
Impact on Capital Flows
 Similarities between crises

• On the basis of reasons

• On the basis of impacts
• On the basis of solutions
 Points of Similarities

• Collapse of financial institutions

• Erosion of trust in the system
• A widening of wealth inequality
• Rigidity of fixed exchange rate system
• High government spending or high fiscal deficit
• High government and foreign debts
• Initial low rates of interest
• Poor monetary policies
• Financial market collapses
 IS ANY CRISIS PREDUCTABLE?

1.What's crisis predictability?

2.History of world crisis ?
3.Currency exchange crisis ?
4.Other factors of predicting crisis
WHY CRISIS IS PREDICTABLE?
1. Against rational expectations ?
2. Overvaluation predicts crises ?
3. Does the market consider overvaluation?
4. Does the market predict crises ?
• THANK YOU