European Sovereign Debt Crisis

Introduction
Contributing factors Globalization of finance Easy credit availability 2007-12 global financial crisis International trade imbalances Fiscal policies of governments Bailout of troubled banking industry & private bondholders Study of Assocham: European Sovereign Debt

Crisis Weapon of Mass Destruction

Real & Financial Sectors

Global pool of fixed income securities - $36 trillion

to $70 trillion from 2000 to 2007 Search for high yields Regulatory control mechanisms

Greece
Early 2000s, one of the fastest growing nation Financial crisis impacts economy

23 April 2010 initial loan of 45 bn

S&Ps downgrade: BB+ to Junk 1 May 2010 austerity measures for securing second loan

of 110 bn Primary deficit: 10.6% of GDP in 2009 to 2.4% in 2011 GDP -6.9% 111,000 companies bankrupt; unemployment 19.9% Feb 2012 IMF official: Excessive spending cuts were harming Greece

Greece (contd)
Greek Exit: orderly default 60% devaluation of drachma Wipe off 20% of Greeces GDP Increase debt-to-GDP ratio to over 200% Inflation soaring to 40% - 50% Hyperinflation, bank runs, military coups and possible civil war (UBS)

Feb 2012: second bail out package 130 bn with debt

restructure agreement 53.5% nominal write off: debt fell from 350 bn to 240 bn May 2012: Grexit 17 June 2012: center-rights victory in election

Ireland
State guarantee to six main Irish based banks 29 Sep 2008: one year guarantee to banks depositors & bond -

holders Sep 2009: guarantee renewed & launch of NAMA 100 bn loss by banks: default by property developers & homeowners Economy collapsed
Unemployment 4% in 2006 to 14% in 2010
Budget surplus in 2007 to 32% deficit in 2010

29 Nov 2010: bailout agreement of with EU, IMF & 3 nations

UK, Denmark & Sweden

67.5 bn bailout 17.5 bn from own reserves and pensions Reduce budget deficit to <3% by 2015

Ireland (contd)
Apr 2011: Moodys downgrade Junk status

Jul 2011: interest on bailout loan reduced from 6% to 3.5%-4%, loan

period increased to 15 years 14 Sep 2011: ESFS on loan of 22.5 bn reduced to 2.59% Nov 2011: Euro Monitor Report Center for Economics and Business Research 24 Jul 2012: cost of 10 yr Govt bonds fell from 12% in Jul 2011 to 6.3%; 4% expected by 2015 26 Jul 2012: Ireland returned to financial markets selling 5bn in long term debt
5.9% for 5 yr bonds 6.1% for 8 yr bonds

Portugal
Carnation Revolution (1974 2010) Over expenditure Investment bubbles through unclear PPP Number of redundant public servants Mismanagement of risky credit, public debt creation & European structural and cohesion funds
16 May 2011: 78 bn bailout package from EFSM, EFSF

& IMF
Interest rate of 5.1% Cut budget deficit from 9.8% in 2010 to 5.9% in 2011, 4.5% in 2012

and 3% in 2013

Portugal (contd)
Unemployment 14.8%, taxes increased, lower wages

frozen & higher wages cut by 14.3%

Dec 2011: one-off transfer of pension funds 3% GDP contraction in 2011 Return to medium and long-term debt sovereign markets

by late 2013

Spain
More a banking crisis

Debt-to-GDP 60% (USD 820 bn in 2010), much lower

than Germany, US Property bubble, banks hit Austerity measures in 2010 Deficit cut from 11.2% in 2009 to 8.5% in 2011; target 3% in 2013 May 2012: 19 bn bailout to Bankia + 4.5bn to prop it up Jun 2012: bailout package of 100bn granted 10 year bond rates 7% in Jun 2012 ECB reassurance

More Issues
Interconnection in global financial

system
Possible contagion Debt protection Credit Default Swaps

Multiple CDS

Thank you