It’s the End of the World as It’s the End of the World as We Know ItWe Know It

The European Debt Crisis, Greece and the Interconnectivity of Financial Markets

Michael Arpey

October 25th, 2012

FRPG 187M - Saint Lawrence University

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Table of ContentsTable of Contents

I. Overview

II. European Debt Crisis

III. Boomerang – Greece in Financial Crisis

IV. Why worry?

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OverviewOverview

Michael Arpey is currently a Managing Director with The Carlyle Group, an alternative asset manager based in Washington, D.C.

Born and raised in Saratoga Springs, New York, Mr. Arpey is an alumnus of Saint Lawrence University, having completed a double major in Government and Pyschology. Mike also participated as a student delegate to the board of trustees and was an active member of Thelmo.

After graduating with honors from SLU, Mr. Arpey attended the Dickinson School of Law and was appointed as General Counsel to the State Treasurer of Pennsylvania.

Prior to joining Carlyle, Mr. Arpey served as Global Head of Private Equity for Prudential and then as Head of DLJ Merchant Banking’s Customized Fund Investment Group

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Overview Overview What is Private Equity?What is Private Equity?

Private equity consists of investors and funds that make investments directly into private companies

Capital for private equity is raised from retail and institutional investors, including public pension funds

Private equity capital helps: • Fund new technologies

• Strengthen balance sheets

• Create jobs

All kinds of companies receive private equity capital

Private Equity Backed Companies Include:

5Note: As of June 30, 2012.

OverviewOverviewThe Carlyle GroupThe Carlyle Group

Established in Washington, D.C. in 1987, Carlyle is one of the world’s largest global alternative asset management firms:

• Carlyle has over 1,300 employees in 32 offices in Africa, Asia, Australia, Europe, Japan, the Middle East, Latin America and North America

More than 1,400 investors from 75 countries rely on Carlyle to achieve premium returns on their invested capital

Denotes Carlyle office

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OverviewOverviewIt’s The End of the World as We Know ItIt’s The End of the World as We Know It

There has been an increased focus on “end of time” narratives in recent years due to a confluence of factors

• Global Financial Crisis

• Civil Unrest

• Climate change and natural disasters

• Nuclear proliferation

Every day the media tells stories of ways in which humanity is just one step away from destruction

• Whether it’s the upcoming ‘fiscal cliff’, the ongoing European debt crisis, or tensions in the Middle East – We are constantly reminded of the possibility of our own demise

However imminent our demise may or may not be, mankind has been resilient throughout time to existential threats and catastrophes

Of the current threats we are facing, the European debt crisis, exemplified by the current situation in Greece, may represent an existential threat to the very foundations of our society

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Table of ContentsTable of Contents

I. Overview

II. European Debt Crisis

III. Boomerang – Greece in Financial Crisis

IV. Why worry?

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The European Debt CrisisThe European Debt Crisis

The European debt crisis is an ongoing financial crisis that has made it difficult or impossible for some countries in the Euro area to repay or re-finance government debt

Crisis due to several factors, including: • Private debts arising from property bubbles becoming sovereign debt as a result of

banking system bailouts (i.e. Ireland bailout)

• Unsustainable public sector wage and pension commitments, corruption and economic mismanagement drive massive debt increase

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The European Debt CrisisThe European Debt Crisis

Despite having a monetary union, the EU has had a very difficult time containing the crisis

• EU is NOT a fiscal union Each country has own tax and pension laws

• Cultural differences between countries result in varied reactions and proposed solutions to the problem

• PIIGS (Portugal, Italy, Ireland, Greece Spain) continue to face the steepest challenges

Among the PIIGS, Greece has had the most difficult time recovering from the crisis

• Lack of political will and inability to effectively implement austerity measures have created an on-going crisis in Greece

• Greece has become a hotbed for civil unrest as protesters and rioters take to the streets to protest austerity reforms

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Table of ContentsTable of Contents

I. Overview

II. European Debt Crisis

III. Boomerang – Greece in Financial Crisis

IV. Why worry?

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BoomerangBoomerang“And they Invented Math?” “And they Invented Math?”

Michael Lewis, noted financial journalist, traveled to Greece to explore the reasons for the crisis firsthand

Lewis met with government officials, tax collectors and Greek orthodox priests

• As a financial disaster tourist Lewis discovered greed, corruption, and mismanagement throughout Greece

“Greek public school system is the site of breathtaking inefficiency”

“Its simply assumed that anyone who is working for the government is meant to be bribed”

An estimated two thirds of Greek doctors reported incomes under 12,000 Euros per year

“We had no Congressional Budget Office”

“The party in power simply gins up whatever numbers it likes, for its own purposes.”

“Greece has no working land registry”

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BoomerangBoomerang“And they Invented Math?” “And they Invented Math?”

Lewis determines several factors led to Greek crisis• Economic Mismanagement: Greek government continued to provide generous

social programs despite lower government revenues

• Inefficient Operations: Greece’s education system is ranked one of the worst in Europe despite having a higher proportion of teachers

• Corruption: Culture of corruption permeates through entire social structure where bribes are necessary for almost everything

— Transparency International ranks Greece the most corrupt country in Europe— Greeks spend an estimated $2,355 a year in bribes to lawyers, doctors and banks

For a country that invented math, simple arithmetic was seemingly absent in Greek budgets leading up to the crisis

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Greece in Financial CrisisGreece in Financial Crisis

In response to the deepening debt crisis, Greece was forced to accept bailout funds from the EU and IMF

Acceptance of these funds required Greece to reduce its spending and implement austerity measures

These measures combined• Tax Increases: Implementation of property tax, excises taxes on fuel, sales tax and

luxury levis on pool, yachts and cars

• Spending Cuts: Pensions cut up to 40 percent. Education spending slashed and schools closed. $3 billion taken out of healthcare spending and thousands of public sector works laid off.

Austerity measures were meant to lower the deficit and save the country but they resulted in …

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Greece in Financial CrisisGreece in Financial Crisis2009 - Present2009 - Present

Civil unrest as youths and public sector workers protest against austerity measures

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October 18October 18thth, 2012, 2012General Strike in Greece Turns ViolentGeneral Strike in Greece Turns Violent

http://worldnews.nbcnews.com/_news/2012/10/18/14537638-general-strike-in-greece-turns-violent-enough-is-enough-says-austerity-protester?lite

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Table of ContentsTable of Contents

I. Overview

II. European Debt Crisis

III. Boomerang – Greece in Financial Crisis

IV. Why worry?

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Why not let Greece default on its debt? Why not let Greece default on its debt?

Since 2008 Greece has suffered mightily with the economy continuing to contract with lightening speed as the austerity measures take hold

• Unemployment almost 20%

• Hospitals facing shortages

• Increased homelessness, suicide, crime and cases of HIV

Just let Greece default..• Greece is 5,000 miles away from the United States. and has a GDP 50 times smaller

than that of the United States1.

• Give Greece a clean slate, only a few bondholders and Europeans will lose money, right?

• This is a European problem, let the Europeans worry about it

Problem with letting Greece default is… we are ALL affected

1) International Monetary Fund GDP Data – 2011. Based on United States GDP of $15 trillion and Greece GDP of$300 billion

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Interconnectivity of Financial MarketsInterconnectivity of Financial MarketsGolden Arches Theory of Conflict Prevention Golden Arches Theory of Conflict Prevention

Globalization has created a world in which countries are more interconnected than ever before

• Turmoil can spill from one economy to another quickly

Historical and geographical boundaries are becoming less and less relevant as countries globalize

As a result of globalization Thomas Friedman introduced the Golden Arches Theory of Conflict Prevention

• When a country reaches a certain level of economic development and has a middle class strong enough to support a McDonalds they become a McDonalds country

• NO country with a McDonalds has ever fought a war with another McDonalds country

Having a McDonalds represents integration into world economy

Interconnectedness of world economy fosters mutual cooperation and economic prosperity

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Greek Default: We are all affectedGreek Default: We are all affectedPossibility of contagionPossibility of contagion

Downside of integration – turmoil can spill from one economy to another economy quickly

Allowing Greece to default would create a domino effect

A euro exit by Greece, Spain, Portugal and Italy could be contagious and devastating to the rest of the world

• The result could catapult the world into a recession and chop $22.26 trillion out of global gross domestic product by 2020, according to a new German think tank study.

While most industry observers believe a Greek default to be unlikely, unpredictable events DO happen and can greatly influence our world

Greece could be the first domino

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September 11, 2001 & Global Terrorism

US invasion of Afghanistan and Iraq

TechnologyGlobal Financial Crisis

2011: A Year of Revolution

Natural Disasters Iranian Nuclear Showdown

Chaos in Syria

Invasion of Kuwait by Iraq

Fall of the Berlin Wall

Collapse of the Soviet Union

Rise of China

Why Worry? Unpredictable Events Happen Why Worry? Unpredictable Events Happen

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Greece Defaults: Why Care?Greece Defaults: Why Care?

The dominoes begin to fall• Greek creditors, among them the United States, lose billions

• Bond yields increase for all countries with sovereign debt risk including the United States

• World economy plunges into recession

Worst case scenario: United States defaults• United States financial markets lose trillions

• GDP shrinks

• Unemployment increases

• Public services cut

• Possible civil unrest

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Hope for the futureHope for the future

Despite the many threats to the existence of man the resilience of humans to existential threats cannot be denied

In the face of innumerable challenges countries have already begun banding together to find solutions to complex problems such as global warming, conflict resolution and economic instability

• European Union

• United Nations

• NATO

Armed with a strong knowledge of global challenges, a new group of capable young leaders will emerge in the coming years

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Top 10 Things I’ve LearnedTop 10 Things I’ve Learned

Relationships Matter

Pay attention to the details

If you can’t trust somebody, no legal agreement will protect you

Make the most of the things others don’t want to do

Under promise and over deliver

Persistence pays off

Don’t be afraid to fail…..too many people sacrifice good on the altar of greatness

In all you do act like an owner

Never stop exploring

Maintain balance in your life

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Questions?

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Further Reading:Further Reading:

“Greek Debt Crisis: How Did Greek Economy Get into such a Mess?” Dan Roberts, The Guardian, May 6, 2010.

“Tackling Corruption in Greece.” Transparency International, 2011.

“On Average Greeks Pay €1,355 a Year in Bribes!” Bild, September 3, 2010.

“How Did the Eurozone Get into its Debt Mess?” Reuters, September 20, 2011.

“Belatedly, Europe Finds a Quick Fix to its Financial Woes.” Eric Reguly, Globe and Mail, October 28, 2011.

“Q & A: Greek Debt Crisis.” BBC News, October 27, 2011.

“COLUMN-Dexia: Stop Press or Deja Vu? John Manley, Reuters, October 6, 2011.

“Greek Austerity: New Measures ‘Catastrophic’ Say Protesters.” Helena Smith, The Guardian, September 22, 2011.

“Opposition Grows in Germany to Bailout for Greece.” Nicholas Kulish, New York Times, February 15, 2010.