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A PRESENTATION
ON EURO
SOVEREIGN DEBT CRISIS
Presented by : Dodiya Shakti
What is Euro zone? It is an economic and monetary union of 17
European union members. Adopted EURO currency as their sole legal tender.
The European Central Bank (ECB) is the institution of the European Union (EU) tasked with administrating the monetary policy of the 17 EU member states taking part in the Euro zone.
Members-AUSTRIA,BELGIUM,CYPRUS,FINLAND,FRANCE,
GERMANY,GREECE,IRELAND,LUXEMBOURG,MALTA,NETHERLAS,PORTUGAL,SLOVAKIA
Eropean union Established in 1993. Currently has 27 members. Committed to regional integration. Ensures the free movement of goods, services, people and capital in all
member states.
Simply what is crisis? In its most basic form, it's just this: Some
countries in Europe have way too much debt, and now they risk not being able to pay it all back. Simple!
The possibility also looms that one or more countries will pull out of the eurozone -- the 17-nation bloc that use the euro currency, which has been around since 1999. Should any of the eurozone nations drop out of this group
Sovereign debt crisis Sovereign debt crisis is a situation
wherein a country with a powerful higher authority enters the state of not being able to repay its debts and obligations.
This leads to higher fiscal deficit of the economy and lower growth.
What is PIIGS? Portugal, Ireland,
Italy, Greece and Spain are some of the most highly leveraged eurozone countries.
The PIIGS took different paths to this scenario. Ireland, for example, underwent a massive real estate bubble, and its banks sustained giant losses. The Irish government wound up rescuing its banks, and now the country is burdened under a huge debt load.
Spain, which now has a 22 percent unemployment rate, also experienced a huge housing bubble. The country didn't indulge in excessive borrowing -- rather, it ended up with high deficits because it couldn't collect enough tax revenue to cover its expenses.
Greece, on the other hand, not only borrowed beyond its means, but exacerbated the problem with lots of overspending, little economic production to make up the difference, and some creative bookkeeping to prevent eurozone authorities from realizing the true extent of the situation.
The deficits weren't piling up everywhere. Countries with strong economies like Germany and France were keeping their output high and their debt at a manageable level. But when 17 nations use the same currency, trouble spreads quickly.
CAUSES In 1992, members of the European Union signed the
Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels.
Germany had a considerably better public debt and fiscal deficit relative to GDP than the most affected eurozone members. In the same period, these countries (Portugal, Ireland, Italy and Spain) had far worse balance of payments positions.Whereas German trade surpluses increased as a percentage of GDP after 1999, the deficits of Italy, France and Spain all worsened.
Monetary policy inflexibility Since membership of the eurozone
establishes a single monetary policy, individual member states can no longer act independently. Paradoxically, this situation creates a higher default risk than faced by smaller non-eurozone economies, like the United Kingdom, which are able to "print money" in order to pay creditors and ease their risk of default. (Such an option is not available to a state such as France.)
Loss of confidence
Sovereign CDS prices of selected European countries (2010–2011). The left axis is in basis points; a level of 1,000 means it costs $1 million to protect $10 million of debt for five years
A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults.
In the event of default the buyer of the CDS receives compensation (usually the face value of the loan), and the seller of the CDS takes possession of the defaulted loan. However, anyone can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan (these are called "naked" CDSs). If there are more CDS contracts outstanding than bonds in existence, a protocol exists to hold a credit event auction; the payment received is usually substantially less than the face value of the loan. The European Parliament has approved a ban on naked CDSs, since 1 December 2011, but the ban only applies to debt for sovereign nations.
Current Crisis - Debt Overhand and Weak Banking Sector
The sovereign debt crisis is now also finely interwoven with the banking system and the prospect of a financial system crisis because many of the institutions that own sovereign bonds are European banks. What the ECB has done most recently is provide cheap refinancing to the European banking system via its long-term refinance operations - "LTRO". The most recent version of this policy came in December 2011, as the central bank offered 3-year loans at 1% interest which saw a big uptake - around 500 billion euro.
Banks were eager to take on those loans as they needed to rollover debts that were coming due in the early part of 2012 and in the later part of 2011, many European banks were facing a financial freeze in terms of finding funding
In the debt restructuring deal currently under discussion, private creditors would swap out their current bond holdings for those with longer maturities and smaller coupons, with the end result being that about €100 billion of the €205 billion will come off the books. The private creditors are doing this on a voluntary basis because it could be worse and Greece could default on the full amount of debt, and the various EU countries will offer "sweeteners" to participants to accept the deal.
By making it a voluntary restructuring, it would also avoid being labeled a "credit event" by credit rating agencies meaning that credit default swaps - insurance against a country not meetings its obligations - would not be paid out.
Thank you