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EUROPEAN DEBT CRISIS

Tarun Chugh
Department Assistant
Hughey Center For Financial Services
History of the Euro zone




        Maastricht Treaty       Amsterdam Treaty
        European Central Bank   Euro Circulation
Countries in the Euro zone
Germany     France
Italy       Spain
Portugal    Greece
Austria     Netherlands
Slovakia    Slovenia
Cyprus      Estonia
Malta       Ireland
Belgium     Finland
Luxemborg
Big & Nuisance Players of EU
Greece, 1.9     Portugal, 1.4      Ireland, 1.3
  Netherlands, 4.8

                                           Germany , 20.2
          Spain, 8.7


       Italy, 12.7
                                                    France, 15.8



                        UK, 13.9
Conditions to be in the Euro zone
 Inflation in each country can only be 1.5% more
  than the average of the 3 lowest nations
 Gross debt to GDP ratio cannot exceed 60%
 Government deficit to GDP cannot exceed 3%
 The interest for the zone cannot exceed more than
  2% points than the average of the lowest three
  nations
Initially Growth was Encouraging
Yields dropped and the party was on…
Reduced the cost of debt for weaker nations
Lowest yield for Italy was 3% Current yield is
7.28%
Stability of the Euro zone let weaker nations
Lever up…
Which they happily did..
H a p p y E u r o p e a n s   !
Financial crisis and European debt crisis are
interlinked
 2008-2009 financial crisis dealt a heavy blow to the
  European economy
 Leverage became a dirty word and it led to a crisis
  of confidence the world over
“The ever-widening financial crisis has
shaken investors’ faith in the whole
system. People no longer trust
assurances that fancy financial
instruments will function the way
they’re supposed to” Paul Krugman 2008
Goldman Sachs deals with Greece
 Greece did deals with investment bankers to hid
  its debt with the use of fancy derivative deals
 Greece used these instruments in early 2000s to
  hid its debt to het entry in Euro zone
 The debt to GDP ratio reduced by 1.6% in 2001
 Full disclosure in 2010 led to the first $ 140 billion
  dollars bailout plan (May,2010)
Euro zone GDP growth 2009
Europe Debt to GDP (2007)
Europe is highly leveraged…
Debt to GDP Ratio (2007)

                             Above 75%
                       Italy Greece Belgium

                               50-75%
                   Austria France Portugal Germany
                               Cyprus
                               25-50%
                     Slovakia Spain Netherlands
                              Finland
                               0-25%
                    Estonia Luxembourg Slovenia
                               Ireland
Debt to GDP Ratio (2010)

                             Above 75%
                   Belgium Italy Germany Greece
                          France Ireland


                              50-75%
                  Netherlands Spain Austria Cyprus



                              25-50%
                     Slovenia Slovakia Finland



                               0-25%
                        Luxemborg Estonia
Central
                 Central Problem
Problem
•Low Growth

•High Debt
Levels
•High
Unemployment
•Slow Decision
Making
Size of the Problem

                     Debt in trillions of Euro

 Ireland
Portugal
 Greece
  Spain
                                                 Debt in trillions of Euro
 France
   Italy
Germany

           0   0.5    1    1.5    2    2.5
Banks hold a bit of Greek bonds
But a lot of Italian bonds
Size of the CDS market
Why don’t the Europeans inflate the debt
away ?
Austerity its not over rated
Greece needs a haircut and badly
And maybe Italy does too
Actions taken till today
 European Financial Stability Fund with resources
  of €780 billion
 50% haircut on Greek bonds which is an orderly
  default
 20-30% guarantee on bonds of the peripheral
  countries
 Calls for Eurobonds and closer fiscal union
Future scenarios
Dilbert’s take on Europe
Questions ?
References
 Washington post
 Reuters
 GMO
 World bank data
 New York Times
 Trading Economics

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European debt crisis

  • 1. EUROPEAN DEBT CRISIS Tarun Chugh Department Assistant Hughey Center For Financial Services
  • 2. History of the Euro zone Maastricht Treaty Amsterdam Treaty European Central Bank Euro Circulation
  • 3. Countries in the Euro zone Germany France Italy Spain Portugal Greece Austria Netherlands Slovakia Slovenia Cyprus Estonia Malta Ireland Belgium Finland Luxemborg
  • 4. Big & Nuisance Players of EU Greece, 1.9 Portugal, 1.4 Ireland, 1.3 Netherlands, 4.8 Germany , 20.2 Spain, 8.7 Italy, 12.7 France, 15.8 UK, 13.9
  • 5. Conditions to be in the Euro zone  Inflation in each country can only be 1.5% more than the average of the 3 lowest nations  Gross debt to GDP ratio cannot exceed 60%  Government deficit to GDP cannot exceed 3%  The interest for the zone cannot exceed more than 2% points than the average of the lowest three nations
  • 6. Initially Growth was Encouraging
  • 7. Yields dropped and the party was on…
  • 8. Reduced the cost of debt for weaker nations
  • 9. Lowest yield for Italy was 3% Current yield is 7.28%
  • 10. Stability of the Euro zone let weaker nations Lever up…
  • 12. H a p p y E u r o p e a n s !
  • 13. Financial crisis and European debt crisis are interlinked  2008-2009 financial crisis dealt a heavy blow to the European economy  Leverage became a dirty word and it led to a crisis of confidence the world over “The ever-widening financial crisis has shaken investors’ faith in the whole system. People no longer trust assurances that fancy financial instruments will function the way they’re supposed to” Paul Krugman 2008
  • 14. Goldman Sachs deals with Greece  Greece did deals with investment bankers to hid its debt with the use of fancy derivative deals  Greece used these instruments in early 2000s to hid its debt to het entry in Euro zone  The debt to GDP ratio reduced by 1.6% in 2001  Full disclosure in 2010 led to the first $ 140 billion dollars bailout plan (May,2010)
  • 15. Euro zone GDP growth 2009
  • 16. Europe Debt to GDP (2007)
  • 17. Europe is highly leveraged…
  • 18. Debt to GDP Ratio (2007) Above 75% Italy Greece Belgium 50-75% Austria France Portugal Germany Cyprus 25-50% Slovakia Spain Netherlands Finland 0-25% Estonia Luxembourg Slovenia Ireland
  • 19. Debt to GDP Ratio (2010) Above 75% Belgium Italy Germany Greece France Ireland 50-75% Netherlands Spain Austria Cyprus 25-50% Slovenia Slovakia Finland 0-25% Luxemborg Estonia
  • 20. Central Central Problem Problem •Low Growth •High Debt Levels •High Unemployment •Slow Decision Making
  • 21. Size of the Problem Debt in trillions of Euro Ireland Portugal Greece Spain Debt in trillions of Euro France Italy Germany 0 0.5 1 1.5 2 2.5
  • 22. Banks hold a bit of Greek bonds
  • 23. But a lot of Italian bonds
  • 24. Size of the CDS market
  • 25. Why don’t the Europeans inflate the debt away ?
  • 26. Austerity its not over rated
  • 27. Greece needs a haircut and badly
  • 28. And maybe Italy does too
  • 29. Actions taken till today  European Financial Stability Fund with resources of €780 billion  50% haircut on Greek bonds which is an orderly default  20-30% guarantee on bonds of the peripheral countries  Calls for Eurobonds and closer fiscal union
  • 33. References  Washington post  Reuters  GMO  World bank data  New York Times  Trading Economics

Editor's Notes

  1. Total of portugal,italy,spain,greece,= .160+1.84+.641+0.329=2.97 trillion (2010)