International financial International financial crisiscrisis

Study of Euro, Mexican & Asian financial crisis.

-By Pawan Kumar Yalla

Gagan Bakshi IIT Roorkee – Process eng with Management

EURO CRISIS

Euro financial crisisEuro financial crisis The Eurozone crisis is an ongoing crisis that has

been affecting the countries of the Eurozone since early 2009, when a group of 10 central and eastern European banks asked for a bailout.

In 1992, members of the European Union signed the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels.

no greater than 3% of GDP.

Private debts arising from a property bubble were transferred to sovereign debt.

In Greece, high public sector wage and pension commitments were connected to the debt increase.

The structure of the Eurozone as a currency union (i.e., one currency) without fiscal union.  (e.g., different tax and public pension rules)

European banks, now own a significant amount of sovereign debt

Causes

easy credit conditions during the 2002–2008 period that encouraged high-risk lending and borrowing practices

the financial crisis of 2007–08 international trade imbalances  real estate bubbles that have since burst the Great Recession of 2008–2012fiscal policy choices related to government

revenues and expenses  approaches used by nations to bail out

troubled banking industries and private bondholders

Video – euro crisis explained as debt ratio’s

GreeceGreece  A research report, explains-

"The current Eurozone crisis has been unfolding since 2009, when a new Greek government revealed that previous Greek governments had been underreporting the budget deficit. The crisis subsequently spread to Ireland and Portugal, while raising concerns about Italy, Spain and the European banking system, and more fundamental imbalances within the Eurozone"

Crisis - processCrisis - processIn the early mid-2000s, Greece's

economy was one of the fastest growing in the eurozone and was associated with a large structural deficit. -( then fin crisis 07-08)

**on 23 April 2010, the Greek government requested an initial loan of €45 billion from the EU & IMF.

Greece's sovereign debt rating to BB+ or "junk" status

Numbers Numbers  a revision of the forecast for the 2009 budget

deficit from "6–8%" of GDP (no greater than 3% of GDP was a rule of the Maastricht Treaty) to 12.7%

 the Greek debt exceeded $400 billion (over 120% of GDP) and France owned 10% of that debt, struck terror into investors at the word "default“

Greece was bailed out in 2010 with a 110 billion euro direct loan by the European Union and the International Monetary Fund.

After 2 years of fiscal austerity and Greek riots, another 130 billion euro loan was made.

moremore  primary deficit—i.e., fiscal deficit before

interest payments—from €24.7bn (10.6% of GDP) in 2009 to just €5.2bn (2.4% of GDP) in 2011.

The Greek GDP had its worst decline in 2011 with −6.9%

 the seasonal adjusted industrial output ended 28.4% lower than in 2005

111,000 Greek companies going bankrupt (27% higher than in 2010).

 youth unemployment rate rose from 22.0% to as high as 62%

Conditions by IMFConditions by IMF reduce the Greek spendings with €3.3bn in

2012 and another €10bn in 2013 and 2014. debt restructure agreement -

- private holders of Greek government bonds forced to accept a bond swap with a 53.5% nominal write-off, partly in short-term EFSF notes, partly in new Greek bonds with lower interest rates and the maturity prolonged to 11–30 years 

- affected some €206 billion of Greek government bonds

 caused the Greek debt level to fall from roughly €350bn to €240bn in March 2012

Greek national account

1970 1980 1990 1995 1996 1997 1998 1999 2000 2001a 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013b 2014b 2015b 2016c

Public revenued (% of GDP)[85]

N/A N/A 31 37 37.8 39.3 40.9 41.8 43.4 41.3 40.6 39.4 38.4 39 39.2 40.7 40.7 38.4 40.6 42.4 44.6 44.6 45.1 44 TBA

Public expenditured

 (% of GDP)[86]

N/A N/A 45.2 46.2 44.5 45.3 44.7 44.8 47.1 45.8 45.4 45.1 46 44.4 45 47.2 50.5 54 51.3 51.9 53.6 58.2 47.1 45.1 TBA

Budget balanced (% of GDP)[39][87]

N/A N/A -14.2 -9.1 -6.7 -5.9 -3.9 -3.1 -3.7 -4.5 -4.8 -5.7 -7.6 -5.5 -5.7 -6.5 -9.8 -15.7 -10.7 -9.5 -9 -13.5 -2 -1.1 TBA

Real GDP growthh (%)[92][93]

8.9 0.7 0 2.1 2.4 3.6 3.4 3.4 4.5 4.2 3.4 5.9 4.4 2.3 5.5 3.5 −0.2 −3.1 −4.9 −7.1 −6.4 -4 0.6 2.9 3.7

Public debti (billion €)[94][95]

0.2 1.5 31.1 86.9 97.8 105.2 111.9 118.6 141 151.9 159.2 168 183.2 212.4 224.9 239.5 263.3 299.7 329.5 355.1 303.9 322.2 322 323.2 322

Nominal GDPi (billion €)[96][97]

1.1 6.8 43.4 88.7 97.5 107.9 117.3 125 135 145.1 155.2 170.9 183.6 193 208.6 223.2 233.2 231.1 222.2 208.5 193.7 182.8 183 189.1 199.5

Debt-to-GDP ratio (%)[43]

[98]

17.9 22.5 71.7 97.9 100.3 97.5 95.4 94.9 104.4 104.7 102.6 98.3 99.8 110 107.8 107.3 112.9 129.7 148.3 170.3 156.9 176.2 175.9 170.9 161.4

On 10 April 2014, Greece returned to international capital markets, issuing bonds worth €3 billion , though its still severely affected and situation is bleak.

Mexican Financial CrisisMexican Financial Crisis

The “Lost Decade” 1980’s and the “Tequila Effect” 1994

1982 – 1986 Causes1982 – 1986 CausesCurrent Account deficitHeavy government borrowing of

short term loansDepletion of government foreign

reservesHigher U.S. interest rates due to

Volcker's anti-inflation policiesFalling oil-pricesLarge capital outflowsPeso devaluation

Gross Domestic ProductGross Domestic Product

SolutionsSolutionsIMF injection of $4.55 billion to

keep from defaulting$3.625 billion from United States

to be repaid in 1 yearLong process of stagnation and

slow growth for yearsCrisis spread throughout most of

Latin world

1994 - Causes1994 - CausesPolitical upheaval, assassination,

and loss of confidenceCurrent account deficit and

Capital flightPeso devaluationLarge amounts of credit flow

domestic and foreignLiberalization of the then

privatized financial sector

Peso DevaluationPeso Devaluation

Mexican Import and Mexican Import and ExportExport

SolutionsSolutions$48.8 billion from IMF$20 billion from U.S.Loans were repaid rapidly Mexico quickly recovered and

returned to global marketsSpread to other Latin countries

did not occur to a great extentEnd of crawling pegged

exchange rate policy and beginning of floating system

ConclusionConclusionMexico learned to not get itself that

position again with a current account deficit and easily retractable capital in-flows.

They learned not to overvalue their currency for fear of another great devaluation and start floating exchange rate policy

Privatized many industries opening them up to foreign markets and reaping the rewards of FDI

1997 Asian financial crisis

The crisis started in Thailand.-Financial collapse of the Thai baht after the Thai government was forced to float the baht due to lack of foreign currency

EffectsEffectsForeign debt-to-GDP ratios rose

from 100% to 167% in 4 of ASEAN countries

 in 1993–96, then shot up beyond 180%

May 1998 in the wake of widespread rioting that followed sharp price increases caused by a drastic devaluation of the rupiah

1998 the Philippines growth dropped to virtually zero

DynamicsUntil 1999, Asia attracted almost

half of the total capital inflow into developing countries.

Credit bubbles and fixed Credit bubbles and fixed currency exchange ratescurrency exchange ratesThailand's economy developed into an 

economic bubble fueled by hot money.The short-term capital flow was expensive

and often highly conditioned for quick profit.  had large private current account deficits

and the maintenance of fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk

Next -Next -the devaluation of the Chinese 

renminbi and the Japanese yen.raising of US interest rates which

led to a strong U.S. dollarthe sharp decline in

semiconductor prices

Last - Last -

led to a large withdrawal of credit from the crisis countries, causing a credit crunch and further bankruptcies.

Numbers - Numbers - Thailand

From 1985 to 1996, Thailand's economy grew at an average of over 9% per year.

 Inflation was kept reasonably low within a range of 3.4–5.7%.

The baht was pegged at 25 to the US dollar.

On 14 May and 15 May 1997, the Thai baht was hit by massive speculative attacks.

reached its lowest point of 56 units to the US dollar in January 1998.

the Thai stock market dropped 75%.

MeasuresMeasuresOn 11 August 1997, the IMF unveiled

a rescue package for Thailand with more than $17 billion.

The IMF approved on 20 August 1997, another bailout package of $3.9 billion.

By 2001, Thailand's economy had recovered the Thai baht continued to appreciate to 29 Baht to the Dollar in October 2010