Euro zone (Union) crisis

Presented byNaushad chaudhary

PGDM-(Finance)Batch-(2012-14)

KOHINOOR BUSINESS SCHOOLMUMBAI

INDIA

WHAT IS EURO ZONE?

• Established: 1st January 1999• It is an economic and monetary union(EMU)of 17 European

Union countries [1-Germany, 2-Italy, 3-France, 4 -Finland, 5-Netherlands, 6-Ireland, 7-Greece, 8-Austria, 9-Spain, 10-

Portugal, 11-Belgium, 12-Luxembourg, 13-Slovakia, 14-Slovenia, 15-Malta, 16-Cyprus, 17-Estonia]

• They have fully adopted the euro as their national currency. • The main objective behind forming Euro zone:

-Reduce trading cost

-Boost tourism -Smooth the economy

PROBLEMS IN EURO ZONE

• Most governments were running a budget deficit. (Spending more than there earning)

• All 17 countries were behaving differently (without any real central fiscal control

• Lack of strong political leadership

INTRODUCTION TO EURO ZONE CRISIS

• Began in 2009 from Ireland: 1990 to 2000-Ireland economy was Booming (But relied on personal debt + overinflated housing market)

• Other Smaller European countries (PIIGS: Portugal, Italy, Ireland, Greece, and Spain) were having too much debt and become unable to repay them.

• The Global financial crises in 2008 affected huge specially to small European countries

KEY FACTORS LED TO EURO ZONE CRISIS

• Violation of EU Rules: -Countries such as Greece and Cyprus did not give real data about the financial and economic

situation -Greece and Portugal were spending more then there revenue -Economy slowdown -Tex revenue started falling down

• Banking Sector Problem: Banks were having a highly risky financial instruments in there portfolio such as:

-Collateralized Debt Obligations (CDOs) -Credit Default Swaps

• Rising interest rates: - Because of Liquidity problem interest rates started picking up

- Become difficult for the borrower to repay there loan

Interests Rates on 10-year Government Bonds (in percent):

• Huge DEBT: Because of rise in interest rates, reduction in government revenue (Tax).

DEBT TO GDP RATIO OF (PIIGS) COUNTRIES:(Whole Europe owes €10.84 trillion) in2009

• Increase in wage rates: Because of inflation

• Investor confidence wavers: Investors started to transfer there money away from the problem.

• Key stakeholders tighten their wallets: Reduce spending, Economy slow down, unemployment

-Government income started shrinking and debts become harder to repay.

MAJOR DEBT RIDDEN COUNTRIES BY JAN 2012

Government debt as a proportion of GDP:

• European Union, Government debt in 2012 (85.3% of GDP)• Total debt should be no more than 60% of country’s GDP

IMPACT OF EUROZONE CRICIS• Investor’s lose confidence on government securities:

- Greek crisis has made investors nervous about lending money to governments through buying government bonds.

• Reduced wealth: By raising tax

• Unemployment: (Spain is experiencing the highest unemployment rate of 20%)

• Global economy slowdown:

IMPACT OF INDIA

Capital Market:• high volatility because of FII’s

• Big (FII) investment leads to increased inflationary pressures (Building of an asset bubbles)

Exports and Foreign currency inflow:• Slowdown in the Manufacturing and Service sectors:

• Depreciation of Rupee (Slow down in Europe, investors investing in US dollar, result USD started appreciating)

• 1/3rd of Indian tourist arrive from Euro zone, which is affected badly after Euro zone crisis.

• Effect of Euro crisis on Indian Export:

PRESENT SITUATION IN (PIIGS)

Budget deficits graph of few European countries:

Greece, Ireland and Portugal still struggling to bring debt under control

EUROPEAN YOUTH UNEMPLOYMENT

GDP OF FEW EUROPEAN COUNTIRES

CONCLUSION

The US crisis led to Global financial crisis, which further spread to Euro zone and caused Euro zone crisis, as these countries were most affected.

Hence US should help the countries in problem to come out from the crisis.

THANK YOU